Wednesday 20 November 2019 4:04 am

Celebrating Germany’s recession dodge? The data isn’t quite as solid as you think

Paul Ormerod is an economist at Volterra Partners LLP, a Visiting Professor in the Department of Computer Science at UCL, and author of Against the Grain: Insights of an Economic Contrarian, published by the IEA in conjunction with City A.M.

Ardent Remainers had a rare bit of good news at the end of last week.

The latest statistics for the German economy showed that, contrary to expectations, it had not fallen into recession in the July-September period.

Economists have come to define a recession as a period when a country’s GDP falls for two quarters in succession. There is no firm scientific basis for this — it has simply emerged over time as a consensus among the members of the profession who follow these things.  

A more decisive indicator is if the economy shrinks compared to the same quarter in the previous year. A cynic might say that the less stringent definition, a fall for just two successive quarters, gives economists more to write about, as such events are more frequent than year-on-year falls.

Still, the two-quarters fall is the definition commonly used. German GDP fell in the second quarter, April to June, but it rose — by all of 0.1 per cent — in the third quarter. A recession has been avoided, and Remainers were relieved by the demonstration (if weak) that the EU’s powerhouse economy was not in decline.

Not so fast. We should take economic statistics such as the growth of GDP with a firm pinch of salt, and remember that, outside of the financial markets, almost all economic data is estimated.

We cannot put the economy onto a set of scales and weigh it. Its size has to be estimated, using a wide range of basic information and assumptions. And that means that the numbers cannot be taken at face value.

For example, commentators noted that the fall in German GDP in the second quarter had been revised, from minus 0.1 per cent to minus 0.2 per cent. 

Changes of this magnitude are small fry. The US has probably the most sophisticated system for estimating the so-called national accounts — the maze of economic statistics which make up the economy. Yet during the depth of the financial crisis, in the fourth quarter of 2008, American GDP was initially estimated to have fallen by 6.4 per cent at an annual rate. As more information came to light, over a period of years, the figure is now believed to be a drop of 8.2 per cent. 

And this is by no means the biggest revision which has been made. In the recession of early 1975, for example, GDP was initially thought to have fallen 11.4 per cent in the first quarter.  The figure was eventually revised to just 4.7 per cent.

These revisions are inevitable given the assumptions — many of them arbitrary — that have to be made in economic analysis. How do we measure the output of the armed forces, for example, or civil servants? There is no market in which these outputs are sold which might give us some clue. The answers are provided by a set of conventions.

Economic statistics therefore paint a broad picture and do not have the precision with which the media has come to treat them.

As a rule of thumb, quarterly GDP growth of 0.5 per cent or above is a sign of a healthy economy. The German data shows that, in terms of the big picture, the economy is currently struggling, regardless of whether an individual estimate is plus 0.1 or minus 0.1.

Main image credit: Getty