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Over the weekend I read an interesting article by Lord Bates about the UK economy and about how the GDP figures are complied.
Just how many of us know what exactly we are talking or reading about in respect of GDP and how the figures are put together? I suspect very few of us and I was prompted to look into this further.
GDP was developed as a way of measuring activity in the economy in the 1930's and is based on data from: 6,000 manufacturing companies, 25,000 service companies, 5,000 retailers, 10,000 construction companies and figures on government spending. The GDP figure is based on just 40% of the data and has a margin of error of 1%.
Imports are excluded from the figures but imports, whether of raw materials or consumer goods, are themselves a significant indicator of economic activity.
Government spending is now so high and supported only by a massive deficit that it must be reduced to reduce the burden carried by private sector businesses. Reductions in government spending are therefore distorting the overall GDP figures disproportionally.
Essentially GDP is a very flawed measure. Taken alone it can be self-fulfilling in creating the conditions for recession. There are many indicators that show this to be the case. Let us look at a few:
1/ Businesses are sitting on a pile of cash, £750bn in all, a record amount. This is because of a lack of confidence in the economy. Partly the GDP figures and, of course, partly the Eurozone crisis causing this lack of confidence. Companies have been holding on to reserves and not investing, holding money in reserve to see them through the hard times that they expect to hit them at any minute.
2/ Regardless of the above business start-ups last year were 471,466 while there were 16,621 insolvencies, in other words a net growth of 454,845 enterprises. These are the best figures we have had for decades.
3/ Unemployment has fallen for each of the last 5 months against a background of a 0.5% drop in GDP. 201,000 more people are now in employment in the UK during the quarter in which GDP fell by 0.5%. In all there are 634,000 more people employed in the UK economy since April 2010.
4/ Exports reached £39.2billion in June. That is close to the all-time record which was itself achieved in November 2011. Exports to China are up 74%, India 94% and Russia 100% all in the past year. For the first time since the 1970's the UK is a net exporter of cars.
5/ Industrial Output rose by 2.9% in June, the fastest rate for 25 years. Manufacturing output rose by 3.3% - the fastest for over 10 years.
Other signs of recovery include inflation up, to 2.9% in July and even house prices have started to rise.
Lets be clear - economic conditions remain very tough and we need more effort to boost business to instil confidence and to get growth. More must be done to deal with the deficit by reducing public spending faster and reducing the burdens on business. The recovery is happening, it is fragile and must be nurtured but it is not all bad news as the media would have us believe.
