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
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
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 It is, as David Pilling puts it in the FT, a slightly outdated and entirely "amoral" number.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.
-
Water companies blocked from using customer money to pay “undeserved” bonusesThe regulator has blocked three water companies from using billpayer money to pay £1.5 million in exec bonuses
-
Will the Bitcoin price hit $100,000?With Bitcoin prices trading just below $100,000, we explore whether the cryptocurrency can hit the milestone.
-
Beat the cost of living crisis – go on holidayEditor's letter As inflation rages, energy bills soar and the pound tanks, what’s a good way to save money this winter? Go on holiday, says Merryn Somerset Webb.
-
How capitalism has been undermined by poor governanceEditor's letter Capitalism’s “ruthless efficiency” has been undermined by poor governance, a lack of competition and central banks’ over-enthusiastic money printing, says Andrew Van Sickle.
-
Don't be scared by economic forecastingEditor's letter The Bank of England warned last week the UK will tip into recession this year. But predictions about stockmarkets, earnings or macroeconomic trends can be safely ignored, says Andrew Van Sickle.
-
The biggest change in the last 17 years – the death of the “Greenspan put”Editor's letter Since I joined MoneyWeek 17 years ago, says John Stepek, we’ve seen a global financial crisis, a eurozone sovereign debt crisis , several Chinese growth scares, a global pandemic, and a land war in Europe. But the biggest change is the death of the “Greenspan put”.
-
The wolf returns to the eurozone’s doorEditor's letter The eurozone’s intrinsic flaws have been exposed again as investors’ fears about Italy’s ability to pay its debt sends bond yields soaring.
-
Things won't just return to normal – that's not how inflation worksEditor's letter You might think that, if inflation is indeed “transitory”, we just need to wait and everything will return to “normal”. But this is a grave misunderstanding of how inflation works, says John Stepek.
-
Car hire and the strangeness of the post-pandemic economyEditor's letter A global shortage of hire cars and unusually high hotel occupancy rates sum up the post-pandemic global economy in a nutshell, says Merryn Somerset Webb, with enhanced demand meeting restricted supply.
-
Why we need to get a grip on our governmentEditor's letter Our government is trying to do too much, enacting policies that are destructive to the private sector. It needs to drop the the feel-good nonsense and create policies that lead to long-term wealth, says Merryn Somerset Webb.
