Not much of a milestone

Britain's GDP is back to where it was before the recession - except, it isn't really, says Merryn Somerset Webb.

Last week everyone got a bit excited. The UK's GDP, we were told, had finally hit its pre-crisis peak. We are now hooray as big as we used to be.

David Cameron and George Osborne called it a "milestone" and most papers reported it with happy exclamation marks. No one mentioned that the US hit the same milestone in 2011.

But if this announcement gave you great joy, perhaps it's worth looking at just what GDP is. It is not a snap shot of an economy's balance sheet. It doesn't tell us our wealth. It measures the flow through an economy the things created in any one year.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

So, if you knocked a city down and built it again to exactly the same specifications, you would see no rise in real wealth. But you would see a sharp rise in GDP.What else?

GDP doesn't factor in the size of the black market the UK's statisticians recently added a bit on to our GDP for drugs, prostitution and the like, but I think we can all agree they didn't add quite enough (if they had captured the whole black economy, GDP would have risen by 20% not 5%).

It doesn't distinguish between good growth (such as the output of entrepreneurial manufacturing companies) and bad growth (such as the bomb-making bonanzas that come with war).

It doesn't tell us how much debt a country has and the extent to which that debt has brought forward growth or the extent to which growth has been driven by super low interest rates.

It doesn't tell us how much of today's growth will be tomorrow's contraction. Look at China, where GDP has been boosted by indiscriminate construction, but there is a "looming haircut" to the number from "a write-off of bad debt, under utilised plants, and unsellable inventories, especially of housing", says J- Capital's Anne StevensonYang.

GDP also doesn't count the negatives of growth, such as pollution. And it can't measure the improvements in our lives that come from lower working hours or technology. It is, as David Pilling puts it in the FT, a slightly outdated and entirely "amoral" number.

That isn't to say that rising GDP is a bad thing. Assuming it isn't rising for too many wrong reasons, it is surely better than falling GDP. But there is another problem in the way we look at numbers. Does the GDP of a country as a whole matter, or does its GDP per person matter?

Given that the end goal (I think) of having governments and of bothering to measure all this stuff is to gradually improve life for everyone, the answer should be GDP per capita. And guess what? It turns out that when you divide our shiny new GDP number by our fast-growing population, the result is still a good 4% off its peak.

Our GDP may have clawed itself back to exactly the same place it first hit six years ago. But the rise in our population means that output per head absolutely has not. Still think that the return of GDP to "pre-crisis highs" means everything is OK? Me neither.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.