Why GDP may overstate the post-recession feel good factor

05 September 2016

By John Hawksworth

Both before and after the Brexit vote, much media attention has focused on the potential impact on Gross Domestic Product (GDP), the official measure of total economic activity in the UK. Opponents of Brexit, including ourselves, argued that this would put at risk the economic recovery seen in GDP data since the global financial crisis. But it seems that many voters did not feel that they had shared in these gains, and distrusted messages from the business and individuals who they felt had gained most from the recovery.

The vote for Brexit raises many questions, but one pertinent one is whether GDP is the best way to measure economic performance: are there better alternatives that would resonate more with the general public, while still being available on a timely basis?

My first suggestion here is to focus on growth in GDP per person not total GDP. This reflects the fact that a rise in total GDP that simply reflects more people living in the UK is unlikely to make the average British resident feel better off.

As the chart below shows, the latest data indicate that real GDP per person in Q2 2016 was just 1.2% above its pre-crisis peak in Q1 2008, as compared to a 7.7% rise in total real GDP over this period. This reflects the strong growth in the UK population since mid-2009, driven in particular by immigration from both EU and non-EU countries. So, on average, UK residents are only a little better off now than before the crisis based on GDP per head.

Altmeasureseconperf010916

My second suggestion is that we focus more on household spending. While corporate profits and business investment add to GDP, not much of this will feed through directly[1] into the income and consumption of ordinary households. Rather they will be concerned about more basic questions such as:

  • Do I have a job?
  • How much do I earn?
  • How much can I buy with this income?

The chart above shows that real household spending per person has recovered more slowly than GDP per person since the 2008-9 recession, having suffered a broadly similar decline during the crisis. Overall, real household spending per person remains around 1% below its pre-crisis peak more than 8 years ago. This makes it easier to understand why the feel good factor remains absent for many ordinary people, particularly outside growth ‘hot spots’ such as London and (parts of) the South East.

This is also backed up by historical comparison of recovery periods. In the seven years to Q2 2016, real household spending per person has risen at only 0.9% per annum, as compared to around 3.2% per annum in the first seven years of the 1990s recovery and around 4.7% per annum in the first seven years of the 1980s recovery. In those cases, household spending tended to grow faster than GDP, adding to the feel good factor, while the reverse has been true during the current recovery.

We could go further and consider a much broader range of indicators of economic performance and well-being, as we do in our Good Growth for Cities index. This includes not just income and jobs, but also factors such as health, education, housing affordability, working hours, commuting time, income inequality and carbon emissions. But this more holistic view comes at a price in terms of the data being less timely and regular, as well as getting into a potentially controversial debate about how to weight the different variables in the index. So while our index can make a valuable contribution to the wider public policy debate, it is less suitable as a simple, timely, regular indicator of macroeconomic performance.

In summary, if we want to focus on a single measure that resonates more with the general public, then real household spending per person may give a more realistic – and less flattering - picture of the UK’s post-recession economic performance than GDP.

[1] Higher investment may eventually feed through indirectly to household income and spending through a longer term boost to productivity and so wages. But by focusing on household spending we will score this gain as and when it is realised for workers, rather than when the initial investment is made as with GDP.

John Hawksworth:
Read profile | Contact by email | Tel: 020 7213 1650

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