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Government GDP Growth Rate Versus Reality

The last couple of weeks have seen a myriad of headlines expressing a fear of recession, asking will we go in to recession and, if so, when the recession will start. Rather than asking the when and if, why aren’t they asking how the when and if are calculated?

Adjusting GDP for RPI inflation makes the growth rate instantly negative. Real GDP is in the midst of a veritable contractionfest. In Q2 RPI adjusted GDP contracted 1.56% on the previous quarter. But that is aggregate GDP. What about per capita GDP?

If the population is getting bigger, GDP should be expanding anyway. The most recent population figures from the ONS put it at 60,975,000 at mid-2007, up 388,000 from mid-2006, a 0.64% increase.

On our provisional estimates the year ending June 2008 will see a 0.6% annual growth rate, about 366,000. The combination of continued indigenous population growth and the change in the mix of migrant labour.

On those estimates we get the following:

You can see the difference calculation method can have on perceived GDP growth rate and, therefore, whether you can claim recession or not.

The Government’s preferred method of calculating GDP growth is to apply the “GDP Expenditure Deflator”, a name with obfuscation built right in. Coincidentally, this method shows the GDP growth figures in the best light, 1.4% on the year for aggregate GDP. Use CPI or RPI inflation and the result is completely different. Only 0.67% growth applying the CPI and a 0.53% contraction applying the RPI.

Switch to per capita GDP from aggregate and things look even worse. Even the Government-friendly version shrinks to 0.80% annual GDP growth. CPI adjusted growth barely manages to stumble in to positive territory at 0.07% and RPI adjusted GDP contracts 1.12% on the year.

Whether you want to accept the Government’s numbers, any of those above or do your own calculations, is up to you.

At the end of the day, media prognosticating of when the recession will hit is meaningless. What you want to know is, “when will it hit you?” Having a clearer idea of what is really happening to the GDP’s growth rate may help you ascertain that.