City always eagerly awaits the latest GDP estimates. These figures dominate the media headlines and huge significance is attached to trivial differences between market expectations and the announced figure, and to subsequent revisions to the data.
But GDP is not something that can be put in a set of scales and measured accurately. The concept is clear – it is the value of national output at market prices. But what are market prices? How do we value the public sector, where there are no market prices? A series of plausible conventions has evolved as to how to value such activities. But there is a substantial amount of arbitrary judgment involved.
Even in the private sector, a vast array of disparate data and estimates have to be taken into account. Measuring GDP is as much an art as a science. The sources and methodology section of the National Accounts tells us that the potential margin of error around any single estimate is plus or minus 1 per cent. A whole per cent! So revisions of 0.1 or 0.2 per cent are scarcely worth commenting on.
This inherent uncertainty of measurement may offer a clue to an apparent economic paradox which is receiving a lot of attention at the moment. Employment has been rising, and is now effectively back to its pre-recession peak. But GDP remains nearly 5 per cent below its previous high. This contrasts dramatically with the UK’s last big recession – a non-financial one – in the early 1980s. When output regained its pre-recession level, employment was 9 per cent below its previous peak.
We have been here before. Not in any of the post-war recessions, when employment fell more than output each time. But to the time of the last financial crisis, in the early 1930s. Then, as now, the percentage drop in employment was less than that in output.
The output of the financial services sector is notoriously difficult to estimate. Last autumn, an excellent article in the Bank of England Quarterly Bulletin noted drily that we “should not have unreasonably high expectations of some of the proxy measures that have to be used to estimate output in the sector.”
In other words, even the Bank has not got much of a clue as to what has been happening to output in financial services. The key point here is that output per worker in this sector is exceptionally high. Even a big fall in output does not have much of an impact on jobs.
Is this what has really been going on? The falls in GDP are broadly correct. But the Office of National Statistics has got the balance wrong. Financial sector output is down sharply, and the rest of the economy is not doing too badly. This would help explain why employment held up much better than expected in the financial crises of both the 1930s and now.
Paul Ormerod is an economist and partner at Volterra Partners, and author of Positive Linking: How Networks Can Revolutionise the World (Faber and Faber, 2012).