We have a quarterly obsession with GDP as a measure of the health of the economy and its progress out of recession. GDP is a crude measure developed in the 1930s: it is the value of national output at market prices. It’s a bit like judging the health of a private corporation by its turnover alone. When we look wider than GDP we get a much different picture of economic performance.
Estimates of GDP are compiled by the ONS based on surveying 6,000 manufacturing companies, 25,000 service sector companies, 5,000 retailers and 10,000 companies in the construction sector. At the time the first data is published only 40% of the data is available. It is therefore a sample and National Accounts: Sources and Methods warns us that the margin for error is plus or minus 1 per cent.
The latest revised estimate for Q2 Output which sent the political and worlds into a spin suggested the economy had contracted by 0.5% – the equivalent of the estimated loss of output from one single day and accounted for by the extra Diamond Jubilee bank holiday.
Moreover, GDP adds in government expenditure when most of us would regard it is a sign of health to reduce the cost of the state and takes out the value of imports which can often reflect increases in economic activity in a trading nation.
When we take a broader view of measures into consideration we get a different picture.
- Employment: We have just witnessed the fifth successive monthly fall in unemployment which is now at its lowest level for over a year. In the same quarter in which GDP told us we were contracting by 0.5% there were 201,000 more people in employment. Since April 2010 there are 634,000 more people in employment in the UK. There are now more people employed in the private sector than at any time in our history.
- Business start-ups: in 2011, these were the highest for decades: There were 471,466 new private sector businesses started last year compared to 16,621 business insolvencies which means that there were an additional 454,845 new businesses generating wealth and employment in the economy which would seem to confirm the employment data.
- Exports: Exports in the UK reached £39.2 billion in June, 2012 close to all-time record levels—the record level being set in November, 2011. Exports to China are up 74% in the past year; exports to India up 94%; exports to Russia up over 100%. The UK is now a net exporter of cars for the first time since the 1970s, Jaguar Land Rover alone have hired an extra 8,000 employees over the past two years.
- Output: On Friday the ONS produced data which showed that UK Industrial Output rose by 2.9% in June—its fastest rise for nearly 25 years. Manufacturing Output rose by 3.3% its fastest pace in over ten years.
As if to underline this hidden recovery of the UK economy we are seeing unexpected rises in inflation to 2.9% in July and houses prices which have been at best treading water since 2009 have started rising again, up by 0.8% in July.
This is not to suggest for a minute that economic conditions are not very tough, but if we over-focus on one measure of the economy then business which is currently sitting on an estimated £750 billion cash pile may lack the confidence to invest which will undermine the strength of the recovery.
The role of the government is absolutely critical in this regard. It is not to pour billions of money that we don’t have into projects we don’t need—this is Labour’s prescription which is what got us into the mess we inherited. No, it is to free up business, stick to Plan A and inspire a nation with an Olympic sized self-belief that we are not just in it together but the evidence clearly shows we are getting out of it together and emerging stronger and fitter than before.