In 2013 (the latest year for which the data used in this post were available) the UK economy was growing, with gross domestic product (GDP) at 2.2%, compared with the EU as a whole, at 0.2%. All was well with the UK economy then, right? Wrong.
The problem starts with GDP itself as a measure of economic performance. In basic terms, it is the aggregate value of all goods and services produced, minus the value of all goods and services used in the process of production. But its use in analysing economic performance is limited precisely because of its broad scope.
If we compare EU GDP in 2013 to individual EU countries’ GDP, the measure is staggeringly useless even in reflecting GDP across the continent, never mind economic performance more specifically.The 0.2% growth cited above suggests that although performance across the EU was poor, there was at least some growth – not all doom and gloom then. But further interrogation reveals that 11 of the 28 EU countries (39%) were actually in recession in 2013; 12 if you include Belgium, with 0% growth. What’s more, 14 of the 28 (50%) were growing at a rate above 1%.
Combining the two, the EU’s GDP growth rate in 2013 failed to usefully reflect 89% of the countries that it apparently stood for. It beggars the question, why pay attention to GDP at all? But that continent-wide failure is also apparent on a nationwide basis.
Returning to the UK, GDP disguises more than it reveals. Specifically, the regional disparities in gross disposable household income (GDHI), or take-home pay, unveil a serious structural imbalance.
English regions’ GDHI per head compared with UK average (=100), 1997-2013
Source: Office for National Statistics (ONS)
Broadly speaking, southern regions performed well above the UK average GDHI and northern regions performed well below, and did so for at least the past a decade and a half (1997-2013). Furthermore, when the countries within the UK were measured, only England was above the UK average, with Northern Ireland, Scotland and Wales well below.
Taking a closer look in an EU-wide context, UK GDHI in 2013 (€22,154) was roughly equivalent to that of the Netherlands (€22,355) and Belgium (€22,911) – two of the richer countries within the region – although still below France and Germany. However, if London, the South East and the East of England are stripped out, UK GDHI drops to €19,893; roughly equivalent to the likes of Iceland and Cyprus. If the northern regions (the North East, the North West and Yorkshire and the Humber) are taken together as a separate measure, GDHI falls even further, to €19,148 – 13.5% below the UK average.
To put that in context, London alone had a GDHI of €28,370 (higher than any country in the EU) and the South East had take-home pay of €26,721 (equivalent to Norway and Germany). Interestingly, London and the South East were also the regions with the greatest internal variation in take-home income, suggesting that a similar distortion took place within those regions, as well as compared with other regions. If we want to locate any of these disparities, GDP is pretty useless in analysing the UK economy, but it isn’t designed to locate them.
As with most countries, the UK economy is actually comprised of several economies with very different components. Applying an aggregate figure to the whole country irons out variations between regions and skews our understanding of just how different and unequal the economy actually is. Ultimately, GDP leads us to underestimate the wealth and performance in the richer regions, and to overestimate it in the poorer regions, disguising the true extent of our economic problems. Indeed, healthy GDP can make it seem like there are few problems at all.
But if it is so misleading, why does GDP continue to predominate debates, discussions and reports about how well economies are doing? A significant part of the answer is that it is a politically useful measure. The majority of the electorate is not, understandably, going to dig into the numbers, so a one-stop figure is a handy reference, and governments exploit it (when it suits them). Apparently, (any) growth = good, contraction = bad. But this isn’t the case.
This kind of reductive economics leads to the short-term policymaking that so undermines the UK economy currently, manifesting in poor relative productivity, structural imbalances (see GDP by output categories in hyperlink) and uneven unemployment.As Jennifer Blake, the chief economist at the World Economic Forum (and many others) recently pointed out, GDP is not a useful metric for measuring the welfare of citizens, which surely is the ultimate aim of economic and social policy.
The tail has been wagging the dog. GDP should be a consequence of balanced, sustainable and nationwide economic performance, not an end in itself.
Matthew Bevington studies on the (MRes) Global Politics at Birkeck