The credit crunch era has not be kind to users of Gross Domestic Product or GDP statistics. Or to be more precise they have not been kind to those who use them as the measure of economic well-being. Regular readers will be aware that I have written more than a few articles explaining their short-comings of which the most recent was the extraordinary goings on in Ireland where earlier this year the first quarter of 2015 saw GDP growth revised up to 21% for it alone. The number itself provides its own critique really. Today sees an update from the UK on the second quarter of 2016 but there have also been a couple of developments illustrating yet more GDP trouble.
If we take the advice of Graham Parker and the Rumour then we need to remind ourselves of two facts. The first is that the GDP series in Japan has been particularly troubled which has 2 main causes. These are that they have struggled to get the data at times and also that the “lost decade” experience has put the numbers under even more pressure. The second is that whilst most countries use the output version of GDP Japan uses the expenditure version ( if memory serves me right New Zealand does too). Only 2 links I can think of there which are the Pacific Ocean and rugby union and neither helps.
Just as an explainer there are three ways of measuring GDP which are to use output (by far the most common), expenditure or income. As they are measuring the same thing they should come to the same answer but they invariably do not. As an example I looked at the numbers for Portugal around 3 years ago and there was a variation of 4%. I will let that sink in as readers recall that these numbers are judged to 0.1%! There are varying ways of dealing with this problem which was dealt with in the UK by a past Chancellor Nigel Lawson who gave orders for the numbers to be merged and the differences therefore to be hidden. I discovered this when I asked for them as officially they are the same now.
This matters as in the credit crunch there was evidence from the United States that the income series was in fact performing the best. Hence I wanted to take a look at the UK. This comes up in the Japanese experience.
Bank of Japan
This has done some research into the subject and concluded this. From the Financial Times.
Japan has begun a revamp of its gross domestic product numbers because of rising concern about their accuracy, following a Bank of Japan report that suggests a huge understatement of growth in 2014………..According to an experimental index prepared by the BoJ, Japan’s economy expanded 2.4 per cent in 2014, rather than falling 0.9 per cent as the official data showed.
The shift here has been from the expenditure data ( what people spend) to the income data or what they earn and with thanks to Simon Cox of the Economist GDP growth now looks like this.
As you can see the most marked difference is in the year of the Consumption Tax rise where a recession becomes strong growth. This is how it was done.
Using comprehensive data from tax returns, instead of the surveys underlying the official GDP numbers, BoJ economists calculated an independent figure for gross domestic income — adding up all the earnings in the economy, which should, in theory, be identical to GDP. (He means official GDP here).
This gives them a higher number.
Those estimates suggest that not only did the economy grow but real output was significantly higher, at ¥556tn compared with ¥525tn in the official figures for 2014.
Why might this be so?
One is that young companies are not answering the official economic census, so those growing fastest are missed by the GDP numbers but covered when they file their tax returns.
Another possibility is that companies misreported their sales in 2014, using the old consumption tax rate of 5 per cent rather than the new figure of 8 per cent, biasing the numbers downwards for that year.
Personally I find it a bit hard to believe that companies did not know the Sales Tax rate! The first argument has some validity and is of course true in most places. Also there is a problem with this.
But the explanation almost certainly rests with a single underlying problem: fewer and fewer people willing to answer official surveys.
That is intriguing as it seems so un Japanese to me.
What is happening here?
By switching series has the Bank of Japan changed the measurement but not reality? That is a danger here and there is a strong possibility that there is a deflator problem ( how inflation is measured) and an element of this is confusing nominal with real GDP. It was an unusual time of inflation changes in Japan due to the Consumption Tax change.
Has it found something? Quite possibly as for example it fits with the business surveys or PMIs from back then although there is a world of difference between saying there was no recession and declaring 2.4% growth. It is odd though that the ordinary Japanese have not been telling is that there economic experience was better than this and we have the problem that we know ( UK and Euro area) that sales tax rises did depress economies there.
Of course there is an enormous moral hazard problem in the Bank of Japan declaring a new set of numbers which if we look at its policies would have it singing along with the Beach Boys.
Wouldn’t it be nice if we could wake up
In the morning when the day is new……..
Maybe if we think and wish and hope and pray it might come true
There was a more specific rebuttal according to The Japan Times.
The Cabinet Office disagreed with the assessment and the methodology used to calculate business profits. It’s unlikely that the economy in 2014 continued as strongly as the previous year, considering that 2013 growth was pushed up by people buying ahead of the tax increase, according to Testuro Sakimaki, executive research fellow at the Cabinet Office research bureau.
One more time we are reminded to wonder exactly what it is that we think we are measuring?
I would like to switch to the UK bit continue looking at the income version of GDP. In the UK this has received regular boosts in recent times from Imputed Rent which is where the numbers assume that people who are owner-occupiers get a notional rent for the property. I have described in the past how there have been substantial revisions to the series with no clear explanation of why. Well in 2016 they have changed yet again for once it looks like lower but again there is no clear explanation. Here from the Office for National Statistics is a statement from earlier this year.
Further, because the method is naturally aligned with the CPIH, the discontinuity in 2010 can be removed and the whole of the series will be on a comparable basis.
Ah excellent! It is now consistent with something which has been a shambles or as they put it “Not a National Statistic” The impact?
Their effect is to raise the level of the estimates of imputed rental and to lower the growth of the pre-2010 series.
Does it matter?
Imputed rental represents around 10% of GDP as measured by expenditure.
Whilst some of this is from the spring the issue is live again and I am chasing it up as the explanations such as they are do not convince.
On today’s journey we learn to have even less trust in the GDP numbers. This is not the fault of the statisticians who mostly do their best it is that they have been sent on a journey that has elements of a fool’s errand. Add in some political interference and you have quite a toxic mixture. The income series on which the Bank of Japan is so keen has its uses but also as I have highlighted its problems.
Ironically in a way the UK had some good news this morning.
UK GDP in volume terms was estimated to have increased by 0.7% in Quarter 2 2016, revised up 0.1 percentage points from the second estimate of GDP published on 26 August 2016.
Although of course what does 0.1% tell us? There was a welcome rise in investment which so many told us would not be happening and places which pushed a post EU leave vote crisis theme like the FT will need a large slice of humble pie in reporting this. From the UK ONS.
0.4% growth in services in July, driven by retail, films and computer programming.
I guess we will not hear from Bank of England Governor Mark Carney today either!
Meanwhile those who remember my theme that our numbers for the important services sector need urgent work can smile and be worried simultaneously by this.
When comparing Quarter 2 2015 with Quarter 2 2016…. 11.6% growth in exports of services, which contributed 1.3 percentage points to GDP growth.