Gross Domestic Peculiarity: Is GDP an adequate measure of economic health?

Tomorrow, the Office for National Statistics (ONS) will publish figures for the UK’s gross domestic product (GDP) for the second quarter of 2012. A third consecutive decline is widely expected, and if past responses are anything to go by, doom-laden predictions of imminent economic Armageddon will follow close behind.

But what does a fall in GDP actually mean for the man on the street, the sole trader or the multinational corporation? Is it really a premonition of financial ruin?

If the past two quarters are anything to go by, it would seem not. In the three months from March-May, employment rose by over 180,000. Alongside this, inflation fell. This hardly points to an economy in terminal decline. In fact it paints a pretty rosy picture. If the ONS reports a fall in GDP tomorrow, none of this will matter.

The problem is that GDP has become shorthand for a country’s economic health, and as the thermometer with which a country’s economic outlook is determined, it is also a political flashpoint. GDP figures are anxiously anticipated by political parties, and key messages are drafted or reinforced well in advance - expect plenty of comments of ‘too far, too fast’ and ‘the mess we were left with’ to be trotted out over the coming days. The resulting political battleground has meant debate focuses on the reasons behind a fall (or rise) in GDP rather than an examination of its relevance to individuals and companies.

So what can the Government do to address this? Some tentative attempts have been taken by Government to move away from GDP as a measure of the nation’s condition. David Cameron’s well-publicised ‘Happiness Index’ was an example of this, but it failed to resonate with a public sceptical of its motives and the relevance of a survey that measured concepts as nebulous as ‘happiness’ and ‘well-being’.

If the Government wants to move away from negative coverage of GDP decline, it will need to provide a much more compelling argument on its ineffectiveness as a diagnosis of a country’s economic health. To do this, it will need to deliver a definitive answer to a fundamental question – ‘If the thermometer is broken, how should we assess the patient?’

John Hood
Consultant
john@linstockcommunications.com