Man Stopping Dominoes Falling Over
Economy

Does GDP still matter?

For those with an eye on the economy, 'GDP day' is always one to mark off in the calendar each month. And it's been a hot topic for the UK in 2019, with the latest update showing zero growth for the period from August to October.

This comes off the back of a bumper Q1 which saw growth of 0.6 per cent, followed by a contraction in Q2 of -0.2 per cent. There was a recovery to the tune of 0.3 per cent in Q3, but these latest figures suggest this may have been propped up a strong July, and that we are now stagnating.

Why is it important?

When it comes to economic performance, GDP, or Gross Domestic Product, remains the chief metric. It can be measured as the sum total of output for goods and services; or of every individual's income; or of expenditure across the country. These are, in effect, three ways of calculating the same thing: the size of an economy over a set period of time.

Growth tables are a popular framework for assessing how countries like the UK are shaping up against other counterparts, and political leaders are often re-elected or ejected based on the level of economic growth that occurs on their watch.

GDP also lends itself to further subsidiary metrics, such as GDP per capita, or the debt to GDP ratio. In the case of the former, we get a better idea of average growth in income per person, while the latter gives us a relative sense of national debt, and the ability of a country to service it.

Is GDP still the gold standard?

Yet in a changing world, where issues like climate change, rising inequality and political instability are surging to the fore, is GDP still fit for purpose as a primary indicator of national economic strength?

Writing in the Guardian recently, Nobel laureate Joseph Stiglitz argues emphatically that it is inadequate. For starters, he cites the 2008 financial crisis, and the fact that healthy GDP figures across the Western world in the build-up gave no forewarning of the meltdown that was approaching. In that sense, it was decidedly unhelpful.

He also points out that GDP can easily paper over the cracks of inequality, as it has done in the past decade. Even the metric of GDP per capita is not necessarily a reflection of shared prosperity, with the economic recovery having left many people behind, and the increased wealth of the top 1 per cent masking the squeeze on wages felt by the middle and working classes.

Another interesting point raised by Stiglitz is that social progress and GDP growth can often be a zero-sum game. For example, the cost of a welfare state, is, in effect, a drain on GDP. It is money which could otherwise be invested in infrastructure or programmes which drive further expansion. Yet the detriment to society of cutting the welfare state would be entirely contradicted by the fillip it provides to growth. It thus becomes difficult to analyse the overall utility within a society in this respect.

His final point is arguably the most salient. We live on a planet with finite natural resources, and an environment with delicate ecosystems. Yet, in many countries, environmental destruction has gone hand in hand with economic growth - even underpinned it, in some cases. So what good does high GDP growth do when it is not sustainable?

A cog in a changing wheel

Of course, the thought-provoking insights from Stiglitz notwithstanding, the idea of abandoning GDP as a key measure of economic health seems premature. As alluded to earlier, it also represents the cumulative total of everybody in society's incomes. Rising GDP therefore means it is highly likely that citizens are enjoying a higher standard of living. 

They are also likely to be spending more, which enables businesses to flourish, and hire more people as a direct result. Additionally, sustained increases in GDP have historically coincided with improvements in health, life expectancy and even happiness.

The key is that GDP is just one of many economic metrics which measure our wellbeing, and should not be analysed in isolation. There are already a number of others which relate to productivity, inequality, employment levels and much more. What will be interesting to observe is whether economists are able to develop new, sophisticated and more-relevant metrics at a time when environmental sustainability is fast closing the gap on economic growth as a priority among ordinary people.

Einstein once said that not all that can be counted, counts. It's a truism which extends into many realms of life. Within economics, there is no doubt that GDP still counts. The big question is whether its share of voice will diminish as the years go by, and whether a raft of new measures will soon take its place.

Right Hand Navigation - Category Post : 

Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.

As with all investments, your capital is at risk.