The UK GDP figures change nothing

Today the Office for National Statistics delivered its first estimate for the UK’s GDP in the second quarter.  With a fall of 0.7% they were a bit shocking – we have had a number of quarters with it being cose to no change, and this looks like a proper lurch downwards.  This has provoked some predictable “told-you-sos” by the government’s critics, who say that it shows that the Coalition government’s policies are failing, and call for less austerity.  But what do the figures actually mean?

Making sense of it all is not easy.  The first point is that GDP is not of huge importance in its own right – only as a proxy for the population’s overall wellbeing.  But in a dveleoped economy this latter is more closely tied to employment – and here that statistics  seem to be slowly moving in the opposite direction.  This has created a headache for economists, since this behaviour isn’t in the script.  Some even say that the GDP figures may be in error.  But they have been saying this for some time now, and revised estimates have not made the figures any better.  We need more evidence from the real world to see if anything very harmful is going on.  If, for example, the decline in GDP is a result of a shrinkage of investment banking, where they is lots of money and few jobs, we needn’t lose any sleep.  Or if it results form people taking time off, e.g. for the Jubilee holiday, then again it is no real cause for concern – provided people enjoy their time off.  The truth is that we don’t have a clear understanding of what is happening, and whether it is in fact particulalry bad.

Well, not quite.  We rely on money income, measured by GDP, to generate taxes to fund the services and benefits supplied by the state.  And to pay off the debts left by past governments.  Given that taxes still fall well short of what they are supposed to pay for, this is a worry.  For now things are OK.  The financial markets aren’t taking fright (even as they are in Spain, whose finances are not in such bad shape).  If they do then we can expect all sorts of nasty consequences as interest rates rise, and possibly inflation too.

But what of the argument that austerity is slowly strangling the economy, and we need to ease off?  This is a topic that I have blogged about many times before.  The austerity sceptics are those who basicly think that a sustainable economy is within our grasp, and it just needs a bit of confidence and an upward demand cycle to reach it.  I remain sceptical.  Slowing austerity may simply be postponing a necessary adjustment – and runs greater risks with those financial markets.  These figures do not provide additional evidence either way on this debate.

The problem for the government is that GDP – and tax income – is falling behind their projections, which makes it look like a failure.  But this is more a criticism of the art of economic forecasting than it is of government policy.  But economic forecasting has long been known to be inaccurate, and it always will be.  Many people, on both sides of the austerity argument, are not surprised that the recovery is so slow.  And the forecasts weren’t even politically motivated – since the government transferred responsibility to an independent body – the Office for Budget Responsiiblity.

Still, the case for using the government’s weight to progress worthwhile investments in house building, transport infrastructure and education remains strong, and no doubt their advocates will use this data to pressure the Treasury to loosen up.  But these investments must be for items that will be of genuine benefit – the right sort of homes in the right places, for example – and not just expenditure for its own sake.  And that makes the process slow.

So, in short, these GDP figures are nothing to get excited about.

2 thoughts on “The UK GDP figures change nothing”

  1. A couple of questions; what is your success criteria for measuring whether the economic policy is working or not? Keynes famously once said if the facts change, I change my mind. What do you do sir?
    It seems to me that the problem is that the government listens too much to the markets – the very people who failed to predict the last recession. The OBR has a shocking record of economic prediction, almost as though they were appointed by the government to be their mouthpiece in the first place. And I wonder what the credit ratings agencies will make of it – having already put the UK on negative watch despite the government following their advice to the letter?
    Of course it is not easy to run the economy at the moment – nothing like as easy as the OBR predicted in 2010. But surely the evidence now has to be that the government has to change course. It can start by sacking the OBR and appoint economists with a better track record. For example George Soros or Paul Krugman.

    1. Thanks for the post, Geoffrey. I think we have a different understanding of the underlying problems of the economy. Optimists, like Paul Krugman (who has admitted he doesn’t know much about the UK economy) simply see the issue as lack of aggregate demand, which means that you can manage the problem as if it was a second-year undergraduate exercise in macroeconomics. It is not surprising that many conventionally trained economists see the economy in that light – but it doesn’t make them right.

      My belief is that the economy pre-crisis was unsustainable, and that any attempt to soak up unemployment by a bit of demand management are doomed to fail – as soon as the stimulus is over, the economy just sinks bank (as indeed happened with the last temporary cut in VAT), leaving nothing to show but extra debt. In economic speak, there is not much spare capacity in the economy right now, because so much of the pre-crash economy was built on falsefoundations. And unlike the 1930s we do not have a ready solution in trying to pump up manufacturing because this market is pretty saturated.

      So I never believed the OBR’s rather optmistic forecast, though I broadly approved of the government’s core policy. I always thought it would take a long time to dig oursleves out, and that overall living standards would fall in the process (because they were unsustainably high in the first place). The main success criteria are about managing the pain equitably – and in particular ensuiring that unemployment did not get out of hand. By that criterion the government is doing more or less OK. And I don’t think the facts have changed, so there is no need to change my mind.

      Incidentally I am not aware that Professor Krugman has any record as an economic forecaster apart from launching broadsides in the New York Times. And George Soros’s record since his 1992 triumph is decidely patchy by my recollection. Both are very clever men with interesting ideas – but I wouldn’t put them in charge of an independent economic forecasting unit! Economic forecasting is in fact impossible to do with any semblence of accuracy, both because of its complexity and from what Mr Soros calls “reflexivity”.

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