The second quarter of 2014 brought a raft of very cheery economic news. The pace of growth in China kicked back up to 7.5% following a mini-stimulus from the government, which included speeding up infrastructure project approvals, tax relief and credit easing. The United States roared back after a particularly bitter winter to post 4.0% growth (at the annual rate). Spain was buoyed by news that growth had accelerated to 0.6% (from the previous quarter) and the unemployment rate has started to fall.
How much should we rely on GDP figures? In the years following the financial crisis, quarterly releases became a battleground for evaluating economic policy, where the success of growth was often defined by the figure's proximity to zero. The first estimates are based on fewer than 50% of business returns, and they are frequently revised, with greater accuracy in later releases. However, much of the political and media noise comes from initial estimates. Additionally, calculating GDP is complex—Nigeria recently announced an 89% increase in its economy after rebasing output to include sectors like telecommunications and film.
Statistical agencies in the developed world can justifiably claim to provide more accurate data but keeping pace with advances in technology and the digital economy is as tough for statisticians as it is for regulators. The UK statistics agency, the ONS, recently announced plans for a change in its national accounting methodology which will double the savings ratio; the United States underwent a similar exercise last year, adding 3% to the size of its economy. Jonathan Haskel, professor of economics at Imperial College Business School, says: “the ONS is probably doing the best it can.” Hardly a ringing endorsement.
Whether GDP figures mean much to those whose salaries have failed to keep pace with inflation over recent years or whose benefits have been cut is also debateable. Venezuela recently trumpeted growth of 1.2% for 2013, which must have seemed a poor joke to the thousands unable to buy food staples due to foreign exchange controls introduced by the government; the very controls which restrict imports giving the rather disingenuous impression of rising wealth.
Animal spirits play a significant role in the economy. Positive growth trends can boost business confidence, encouraging investments in machinery, acquisitions, new products, or hiring. Similarly, consumers may feel compelled to buy a car or take out a mortgage, expecting their wages to rise. The house price bubble in London and southeast UK, now becoming more evident, can be attributed to both the recent positive economic data and factors like a shortage of new construction and foreign capital influx. This mix of optimism and external influences shapes economic decisions and market trends.
The release of GDP data therefore has ramifications beyond the realms of economists and politicians. Positive news can boost the spending plans of households and businesses, driving growth and becoming self-fulfilling; a virtuous cycle you might call it. For now the global economy seems to be moving onto a more sustainable footing (despite pockets of conflict and the perennial spectre of the eurozone crisis) with business investment and consumer spending creeping upwards. Long may the good news continue.