How should we measure economic prosperity in the UK?
This is neither a new question, nor an easy one to answer. But it is also a topic that refuses to go away. Economists tend to default to Gross Domestic Product (GDP) – the total value of goods and services produced by an economy – as a shorthand for economic prosperity. In my experience Times readers are quick to challenge anyone who quotes GDP in isolation as a measure of economic strength. Alternative data for GDP – such as GDP per capita where statisticians adjust for population growth – as well as data regarding health and wellbeing, life expectancy, employment, and the purchasing power of household income are often cited as more suitable measures. Each of these data have their merits.
Take last week’s GDP release for November for an example of the problem. The Office for National Statistics estimated that the UK economy had grown by 0.3% over the course of the month. If I wanted to be mischievous – or had an election to win – I might be tempted to suggest that the UK economy is now growing at an annualised rate of more than three and a half percent. Boom time Britain! But fellow mischief makers would counter that in October the UK economy appeared to be shrinking at an annualised rate of more than three and a half percent. Recession! I make this point simply to illustrate the importance of context to almost every economic headline we are subjected to. Without it we fall victim to partisan framing, or clickbait journalism. If I have one idealistic wish for 2024 it would be that UK economic comment becomes more plural, more contextual – rather than obsessing on the latest single piece of data.
Taken in the round, recent economic data suggests that the UK economy has trodden water for the last twelve months. Devoid of any context this is depressingly poor. However, it is this columnist’s opinion that flatlining is a decent achievement for the economy given the external headwinds of a large increase in interest rates, much higher energy and food costs, and two globally significant wars. It is certainly a far better outcome than the Bank of England foresaw when in late 2022 it forecast the longest UK recession in 100 years.
Context is also important when appraising the latest threat to economic stability. Last week a journalist called me last week to ask about my thoughts about a spike in oil prices from events in Yemen and the Red Sea. These are potentially seismic events with big implications for household inflation. However, I felt obliged to remind the journalist that, in fact, the oil price is down 20% over the last three months. Natural gas is down by more than 40% over the same period. This looks set to feed through to lower retail energy prices in the Spring. Right now, the spending power of UK households in 2024 looks rather more favourable than it did last year. This may change of course – I have no special insight into the minds of the Houthi rebels – but short-term movements in commodity prices rarely offer much economic insight.
So if we think GDP without context is a deficient measure, what do other measures of economic prosperity tell us about the UK economy? Data on UK GDP per capita suggests a more pronounced slowdown in prosperity growth in recent years than is told by the overall GDP data. Whilst over the last 20 years while UK GDP has grown at a subdued 1.3% a year, growth in GDP per capita has been half this at a miserly 0.65% a year. A similarly dispiriting picture is revealed when looking at disposable income growth which has risen by just 1.0% a year over the last two decades. Last week’s updated data on life expectancy draws an even more sobering picture. Life expectancy at birth has not budged for a decade, having risen by seven years during the previous three decades.
But it is not all bad news. Since the ONS started collecting measures of well-being in 2011, levels of happiness among Britons have risen – as have measures of worthwhileness and life satisfaction. Even anxiety levels – at least according to this survey – have remained stable despite the prevailing narrative. And when it comes to employment and jobs, the last decade has seen an average unemployment rate of 4.8%. You must go back to the 1960s to find a decade with such low levels of involuntary worklessness.
As they carve out their own economic credentials, the opposition Labour Party have implied it is also unhappy with a simple GDP measure with which to measure prosperity. Labour is inviting the electorate to judge them on delivering the “highest sustained growth in the G7” using a basket of four measures: GDP per capita, disposable income, productivity, and a rather vague reference to “good jobs”. Admirable plurality using a range of UK national statistics – but even this is not without its challenges. As recently as last August the ONS was reporting that the UK had the slowest economic rebound from the pandemic in the G7, and the economy was smaller than pre-pandemic levels. Then back in late August this was revised away – with the UK economy being estimated to have grown materially quicker and looking less of an international laggard. Similar revisions to population growth and productivity estimates in recent years call into question whether these alternative statistical measures can provide timely judgements.
This all sounds like a turf war over politicised narratives, and unreliable statistics. It can appear a long way from anything of relevance to households and businesses, and remote from people’s daily lives. But there are real world implications of how the UK measures its economic prosperity. Investors looking to build firms, create jobs, build infrastructure, and carry out research look at economic performance as part of deciding where to locate. Getting the data right is an important part of positioning the UK as open for business.
Published on The Times: 15/01/2024