In the second quarter of 2012, the British economy shrank by 0.7 per cent. Upon hearing the news last week, the British commentariat rose up as one and demanded that something be done.
But as Chris Giles points out in the Financial Times, "the correct "something" is entirely dependent on the true underlying health of the economy." And that’s the nub of the issue, because the various economic indicators appear to be all over the place:
- "Take the UK’s latest official jobs numbers. Total employment is up 159,000 over the six months to May. That is a faster average growth rate than the whole expansionary period between 1993 and 2008, a time when GDP growth averaged 0.8 per cent a quarter. Official employer-based surveys of recent job growth are even stronger. From the labour market, then, the official picture of the economy is healthy and normal."
This is extraordinary: the growth figures say one thing, the employment figures another thing entirely. What we need is a third yardstick and luckily we have one:
- "Tax revenues provide another economic indicator, one based on real data rather than surveys… The two taxes least susceptible to such distortions are value added tax and national insurance. In the second quarter of 2012, official figures show VAT revenues 5.8 per cent higher than the same period in 2011 and national insurance receipts that were 4.7 per cent higher. These annual growth rates are a little lower than the 1993 to 2008 averages – 6.3 per cent and 6.6 per cent respectively – but also suggest good spending and income growth."
So, what on earth is going on? Are the growth figures wrong and the job figures right? Or is it the other way round? Or could it be that they’re both right, meaning that labour productivity is dropping like a stone?
Chris Giles argues that not being able to tell from the official statistics is a public policy disaster:
- "If the underlying economy is growing steadily as suggested by tax revenues and employment, no plan B is required; the current monetary stimulus would be more than sufficient. However, if the GDP figures are accurate, we need to think radical thoughts. And if feeble productivity is the villain, a drive on supply-side reform is the best bet – but public policy cannot hedge its bets."
He does, though, have a helpful suggestion:
- "The chancellor should signal to the Office for National Statistics that he would be delighted if Britain’s statisticians stopped their £2m-a-year investigation into national wellbeing and instead spent the money on a better understanding of the economy."
Fair enough, but until such time as this happens let us speculate: It may just be that the discrepancy between the various indicators is explained by the fact that, for years, apparent economic growth has been exaggerated by the inflation of asset bubbles – above all in property and finance. With the flow of cheap credit cut off, the bubbles have burst – impacting the growth statistics, but leaving the real economy chugging along regardless.
It’s a bit like a pint of beer. Without the froth, the glass appears emptier – but what really counts is still there.