The Indy, Times and FT all say that 16 years of unbroken economic growth have come to an end, with the news that GDP stagnated in Q2. But this is true only if you look at one particular measure - seasonally adjusted GDP at constant market prices. Two other measures tell a different tale.

One is the unadjusted GDP series*. Though we don’t have Q2 data yet, this fell by 2.4% in Q1. It’s fallen in the first quarter of every year since 1974. On this measure, the best we’ve managed is three quarters of continuous growth.

I mention this not to be a pedant, but to ask a question: if we can tolerate GDP falling in Q1 every year before seasonal adjustment, why should we worry so much that it falls occasionally and slightly after seasonal adjustment?

The other measure is seasonally adjusted gross value added at basic prices - which is the standard output-based measure**. This is just GDP excluding taxes and subsidies that affect prices. Like GDP. this measure stagnated in Q2. But it also stagnated in Q2 2001. So, seven years of unbroken growth have come to an end - a less dramatic claim.

16 years of unbroken growth, therefore, existed only as a statistical artefact.

Is the end of it an interesting thing? One way to tell is to look at the standard deviation of growth around its average. Since Q2 1997, seasonally adjusted GDP growth has averaged 0.7% a quarter (arithmetic average), with standard deviation of 0.26. On this reckoning, zero growth is a 2.7 standard deviation event - a 0.3% chance. That’s a notable event.

However, the standard deviation since quarterly data began in 1955 has been 0.99. On this reckoning, zero growth is only a 0.7 SD event - a one-in-four event. That’s not noteworthy.

So, the interesting thing is not that we had “16 years of unbroken growth”. It’s that seasonally adjusted growth was so stable between the early 90s and mid-00s.

The questions, then, are: has GDP volatility increased? Why? By how much? I wouldn’t look in the papers for answers to these.

One is the unadjusted GDP series*. Though we don’t have Q2 data yet, this fell by 2.4% in Q1. It’s fallen in the first quarter of every year since 1974. On this measure, the best we’ve managed is three quarters of continuous growth.

I mention this not to be a pedant, but to ask a question: if we can tolerate GDP falling in Q1 every year before seasonal adjustment, why should we worry so much that it falls occasionally and slightly after seasonal adjustment?

The other measure is seasonally adjusted gross value added at basic prices - which is the standard output-based measure**. This is just GDP excluding taxes and subsidies that affect prices. Like GDP. this measure stagnated in Q2. But it also stagnated in Q2 2001. So, seven years of unbroken growth have come to an end - a less dramatic claim.

16 years of unbroken growth, therefore, existed only as a statistical artefact.

Is the end of it an interesting thing? One way to tell is to look at the standard deviation of growth around its average. Since Q2 1997, seasonally adjusted GDP growth has averaged 0.7% a quarter (arithmetic average), with standard deviation of 0.26. On this reckoning, zero growth is a 2.7 standard deviation event - a 0.3% chance. That’s a notable event.

However, the standard deviation since quarterly data began in 1955 has been 0.99. On this reckoning, zero growth is only a 0.7 SD event - a one-in-four event. That’s not noteworthy.

So, the interesting thing is not that we had “16 years of unbroken growth”. It’s that seasonally adjusted growth was so stable between the early 90s and mid-00s.

The questions, then, are: has GDP volatility increased? Why? By how much? I wouldn’t look in the papers for answers to these.

**series BKVT for those brave enough to use ONS time series data**** series CGCE.*
And don't forget GDP per capita...

Posted by: Kit | August 23, 2008 at 04:20 PM

and more importantly, is GDP the sole measure we should use for determining the success or failure of policy?

Posted by: Planeshift | August 25, 2008 at 12:59 AM

Nice piece. Highlights how pols (of all shades) will shamelessly seize on an abstruse aspect of a topic most people don't understand, reduce it to an over-simplified stat and then trumpet it as a good thing. Until it comes back to bite them. As Planeshift implies, GDP ain't much of a measure of anything meaningful - and I rather suspect if you took other, broader, readings - a 'happiness' index or whatever, health stats, adult literacy etc, we'd find UK plc deep in deficit.

Posted by: rockinred | August 25, 2008 at 09:02 AM