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Soapbox: Why we should all ignore GDP statistics

Recent press reports have suggested the European economy is plunging into a triple dip recessionary phase. But if we need to know how the economy is faring we should look more closely at the figures where some startling trends are evident, argues Robin Chater, the Secretary-General of the Federation of European Employers. 

Robin believes that governments should focus more on measuring consumption, the size of their grey economies, changes in the mix of goods consumed in response to price changes and improving ways to record exports in services and bartered transactions - in the hope that a better measure of GDP can be developed. He sets his arguments out here:

Gross Domestic Prices at constant prices - or Real GDP - is used widely by economists and politicians to indicate the volume of wealth generation in a particular economy or region. Yet as a single figure it summarises nothing more than a set of assumptions applied to a fluid mix of disparate data.

Take as a starting point what GDP does not measure. It excludes millions of transactions that are not recorded in conventional monetary terms - such as work carried out in households. Bartering is a multibillion dollar business worldwide - but it does not register in trade figures. The grey economy (and associated tax evasion) can also amount to as much as a third of business transactions in some countries - but it does not get taken into account by statisticians compiling national accounts data. GDP does not also take into account changes in asset values, product quality or economic sustainability...

Real GDP is also highly sensitive to the measure used to deflate GDP at current prices. The mix of components in the basket of goods and services used is changing all the time (as when, for instance, fuel prices rise) and yet the weightings used to compile the index are fixed for a year - or even longer.

Possibly the biggest distortion occurs because the population generating GDP is constantly changing and is not constant even between one month and the next. For instance, since 2005 the population of Spain has risen by over 7% and the UK by 5%, yet remained static in Germany. This problem can be overcome to some extent by using per capita GDP figures - but this does not take into account the contrasting position of countries that are gaining population because of immigration and those that are doing so by increases in the birth rate. In the latter situation newly born children will add nothing to the GDP figure and yet depress the per capita GDP figures.

If we look below the headline GDP figures it is clear that some countries barely felt the effects of the economic earthquake that hit the world's economy in 2007. Per capita domestic demand outstripped inflation in countries such as Belgium, Italy and Switzerland. The only two countries that really experienced a sustained drop in domestic demand were the UK and Ireland. Similarly Gross fixed capital formation remained fairly stable across the European Union, but between 2005 and 2010 it fell substantially in Ireland and the UK.

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23rd November 2012