Bank: asset bubbles may have skewed GDP figures

Tim Wallace
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THE HOUSING boom and other changes in asset prices could have led statisticians to overestimate the contribution of financial services to GDP, according to the Bank of England’s quarterly bulletin, out today.

As the sector grew twice as fast as the economy as a whole, its position as a driver of growth is not in question, but the exact pace is debatable.

A difficulty with rising house prices comes when indirectly measuring banks’ output. One main measure, financial intermediation services indirectly measured (FISIM), is based on deposits and loans. It assumes that the value added is represented by the margin banks make.

This is never going to give perfect results, and the report suggests it may have become less accurate when house prices boomed. There was no increase in the number of loans approved in the boom years, but the size of those loans increased. “That suggests little change in output, but the stock of mortgage lending … rose by almost 60 per cent” – which could artificially inflate the value added by the sector.

The report believes up to 0.1 per cent of GDP each year may have been wrongly attributed to the sector, which could knock total GDP slightly.