The fuzzy accounting in GDP measurement

By Scott McCulloch on Jan 27, 10 11:13 AM in Economy

The announcement the UK has now left recession after reporting 0.1 per cent growth brought some cheer to businesses hoping the longest period of gloom since the Great Depression is finally behind us.

The problem the government faced was the fact entering into a seventh consecutive quarters of negative growth would give the appearance we were headed down the road to depression.

The ONS figures also have an error range built-in, which are generally not published, but the figures range from between -0.2 per cent and +0.4 per cent.

Of course the 0.1 per cent growth figure will be adjusted to provide a more accurate account in the coming months, but for now we will have to settle for the less accurate range figure.

So, are we really out of recession just shy of 550 days of negative growth?

First off, the measure of recession is taken from the results of two consecutive quarters of negative growth, so it's a bending of the statistical rules to assume just one quarter of nominal growth is enough to end a recession.

Statisticians generally work on the principals of 95 per cent confidence intervals - which estimates a range of values but also include any unknown values - in order to quantify any uncertainty, which means a figure of 0.1 per cent provides no real evidence of any growth in the economy, since there are so many variables which have as yet to be factored into these figures.

Pre-Christmas spending figures for November using credit cards or other forms of finance - rather than hard cash - was reported to be £4.3bn - the first rise in consumer credit use since April 2008.

The Office of National Statistics said the 0.1 per cent growth was on the back of retail spending, car sales, hotel and leisure; though the car sales are in themselves being propped up through the scrappage scheme funded by the tax payer.

Spending on car finance rose by more than £900m year-on-year, and coupled with a 4 per cent rise in store credit, the growth being touted as a move out of recession appears to be based upon the same principals which drove the economy into such an awful state in the first place.

Consumer spending on big ticket items before the VAT rise on January 1 may have spiked retail figures, but nominally at best.

A retail survey conducted by accountants KPMG said like-for-like non-food sales in Scotland actually grew by just 0.8 per cent in December, which in the context of a 4 per cent fall in December 2008 suggests the picture on the high street is far from rosy.

Also, the UK economy in real terms 'actually grew' through the Bank of England led £200bn asset purchase scheme enshrined in the Quantitative Easing programme.

That £200bn, if the GDP standards are to be adhered to, represents a 12 per cent growth in the economy in real terms based on the 2008 UK GDP of $2,680bn published by the International Monetary Fund.

GDP is the measure of the monetary value of the economy, and as such, adding more money to the economy should show up as a positive increase, but given this 'new money' is in fact new debt, it's a bit like saying your net worth has increased because your bank extended your overdraft by £200.

The UK is presently borrowing somewhere in the region of £3.5bn - a week, and net debt to GDP is expected to reach 77 per cent by 2014.

One of the world's largest bond houses, Pacific Investment Management, has now warned its investors to avoid the UK economy, believing the sheer volume of gilts purchased by way of the Quantitative Easing programme and the prospect of a significant devaluation of Sterling means the UK economy is now "sitting on a bed of nitroglycerine".

Given the fact consumer spending tends to hibernate through January and February, these latest GDP figures merely highlight just how much the UK economy is now pegged on consumer spending.

The next quarter should provide a better idea of the true overall health of our economy, and if we are indeed out of recession - or ever really left it.