There’s a growing school of thought that the lodestar for the UK economy should be growth rather than consumer prices. Well, there’s nothing wrong with setting the Bank of England a GDP target that it misses instead of it failing to hit an inflation target, but we’ll need to devise better growth statistics if the whole economy depends on them.
The incoming Bank governor, Canadian Mark Carney, has mooted making nominal GDP the axis of the economy instead of inflation and there is a phalanx of academic economists and teenage scribblers that would like to see the target switched.
But whereas official inflation figures are calculated monthly, GDP data comes out only four times a year. (Well actually, there are 12 GDP figures but eight of them merely confirm or correct the other four.) That makes spotting trends difficult. One rogue inflation figure is revealed as that the following month; if a quarterly GDP statistic is wayward, it is another three months before we can see if it was a fluke or the start of a new trend – and another three months before that trend is confirmed. By then, it is too late for the Bank of England to adjust monetary policy to steer the economy back on course.
Further, growth figures tend to be very small – even when the economy is growing healthily rather than flat-lining. GDP data is commonly expressed as a percentage change from the previous quarter rather than as an index figure like the RPI or CPI inflation measures. So what looks like a 0.3 per cent contraction in the economy actually means the economy is at 99.7 per cent of where it was previously. Since the start of 2012 the figures have been 99.6, 99.7, 99.6, 100.9 and 99.7 per cent: that’s pretty fine tuning.
(But don’t confuse those numbers with index figures: an index would go 99.6, 99.3, 98.9, 99.9, 99.6. Ie, down, down, up, down rather than up, down, up, down. Understand? No, few do, but if figures that look like a rise are actually a fall, don’t expect widespread public support.)
What’s more, Britain’s GDP figures are prone to revision. Usually by just 0.1 or 0.2 per cent – but that, currently, is roughly the extent of the quarterly growth or contraction in the economy, so it is quite significant. In mid-2012, the initial GDP contraction was revised by 0.3 to 0.4 per cent.
The truth is that the RPI or CPI figures may be equally in need of frequent revision but statisticians realise that so much depends on them – from the Bank’s interest rate policy to the return on index-linked gilts and changes in pensions – that it avoids changing them after publication. It would be embarrassing if the Bank decided policy on a set of numbers that radically changed a month or two later.
At present the Bank governor has to write a grovelling letter to the chancellor each time inflation differs by a percentage point from the 2 per cent target. Presumably similar correspondence would be required when growth is missed – though blaming the governor alone for Britain’s sagging economy seems unfair. At least quarterly figures would mean fewer letters. But would the chancellor have to write back months later apologising if the original data had been revised back towards the target? There is much to sort out before nominal GDP can become the Bank’s new target.