We currently have a situation where the labour market and GDP growth statistics are telling a different story.
- GDP growth is slowing, while employment data continues to be robust
- This suggests people are being employed but aggregate output is not rising
- The answer may lie in those parts of the economy that are ‘under the radar’
GDP growth rates in the UK have been slowing: The first two quarters of this year have seen a relatively anaemic 0.2% and 0.3% growth. However, employment statistics have been more robust, showing a 0.4% increase in employment in the first and second quarters. This means that more people are being employed, but aggregate output is not increasing.
Why might this be? Those hired might be extremely unproductive. It may be that labour market statistics are wrong. Most economists seem to prefer this theory as it supports their view that the UK economy will inevitably weaken after Brexit. However, Richard Jeffrey of Cazenove Capital has long suggested that the economic data we receive may not be entirely accurate. In a recent article for Investment Week, he cites numerous examples where official data has had to be revised.
“GDP data understates the true level of economic activity as more and more people are involved in new and fast-growing businesses”
His argument is that published GDP data understates the true level of economic activity as more and more people are involved in new and fast-growing businesses, particularly in the technology sector. He points out that it is very difficult to account for the production and consumption of internet-based products in official statistics. The problem is likely to get worse as these sectors grow and employ more people.
Does this matter? To the extent that economic and monetary policy is based on official statistics, yes, it matters. If the Bank of England is underestimating the level of GDP growth, monetary policy may be inappropriate and allow inflation to rise.
However, it may also mean that the picture for the UK economy is not as gloomy as has been suggested. UK assets have been subject to a Brexit discount, but this may not be entirely warranted. This would be positive news for domestic investors.