GDP

The gross domestic product data for the second quarter of 2014 showed that the US economy bounced back strongly, and with enough vim to justify the view that its first quarter weakness was largely due to bad weather.

However, the productivity figures provided another bad surprise. In the first quarter GDP per hour worked fell, and it would therefore have been reasonable to expect it to improve with the sharp recovery shown in the second quarter. In fact, there was another fall.

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US gross domestic product was increased last year by much more than the growth of the economy. This sleight of hand was achieved by changing the way GDP is measured. The UK is due for a similar make-over this year. Reality won’t change and we need to be alert to the comments of those who will think it has.

“Nearly all scientists believe that there is a clear-cut distinction between fact and theory…William Whewell (1794-1866) denied that any such sharp distinction existed.” Peter Medawar, the Nobel laureate, whom I am quoting, agreed with the denial; and, as GDP data are generally considered to be facts, the revisions show that Whewell was spot on. The calculation of GDP depends on the theoretical model on which it is based. The change in GDP involves a change in the model being used and, in my view, the new model is worse than the old one. Read more >>

It is widely, but by no means universally, accepted among economists that the “rate of interest” is closely related to growth. It is, however, also generally accepted that this applies to a closed economy, such as the world as a whole.

The growth rate of G5 countries has been declining steadily for years, and this trend has recently accelerated, as chart one shows. It seems likely that low growth has become endemic and this is being widely interpreted as implying that real interest rates will remain low. This view strikes me as being unjustified on theoretical grounds and is also a very dubious conclusion to draw from the past. Read more >>

Last year the UK ran a fiscal deficit of 6 per cent of gross domestic product. Its main counterpart, as chart one (below) shows, was the current account deficit – ie, 70 per cent of the deficit was financed by foreign savings (RoW). (Due to statistical discrepancies, which I have added to the rest of the world, the figures shown in the chart for foreign inflows are almost but not exactly equal to the current account deficit.) The data go back to 1987 and, as the chart shows, the UK has run a current account deficit in every year since then. If the fiscal deficit is to fall, so must the current account deficit.

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Fixed capital investment, which excludes changes in inventories, comprises business investment in equipment and intellectual property, such as research and development, government investment and housing. In total, as I show in chart one, there has been a slight pick up since the trough of 2010 but, as a percentage of gross domestic product, it is still lower than it has been in any year between 1948 and 2008. This is the case for business investment in plant and equipment as well as for investment in total.

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Before the recession of 2008/09, the US economy grew fairly consistently at about 3 per cent a year. This was, for example, the growth rate achieved up to the end of 2007 whether it is measured over the previous 20 or 30 years. In the four years since the economy hit its nadir at the end of 2009, it has grown at 2.6 per cent a year. It is widely assumed that the trend growth rate of the US economy, ie, the long-term potential growth rate of the US economy, is at least equal to this lower rate of 2.6 per cent a year. Read more >>

Japan increased its consumption tax from 5 per cent to 8 per cent on April fools’ day. It seems unlikely that the negative impact of this on demand will be totally offset by other changes in the budget. There is therefore a risk that Japan’s economic growth this year will fail to match its trend rate (ie, its economy will grow less than its potential). The most likely way that this will be avoided is for Japan’s exports to pick up.

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Japan has a national debt amounting to 250 per cent of its gross domestic product and, as its fiscal deficit is running at about 10 per cent of GDP, the ratio is rising rapidly. At some point this will cause a crisis. What cannot go on for ever will stop; when I do not know, but Japan does need to start bringing down its budget deficit and it will not be able to do this unless it reforms its corporate tax system and, in particular, brings down sharply the allowance allowed for depreciation. Read more >>

Deflation provides a good example of economists’ bad habits. They assume that people behave in the same way even if they live in different countries and that their behaviour does not change over time. They are sometimes right. But deflation and inflation show how misleading this tendency to generalise can be. Today deflation is a danger for the eurozone, but not for Japan.

Deflation can cause problems, but not always. As I pointed out in my previous blog, since its market crashed in 1990, Japan’s gross domestic product grew more when prices fell than when they rose. Read more >>

Abenomics – the policy endorsed by Shinzo Abe, the Japanese prime minister – aims to raise the country’s growth by getting rid of deflation. It is based on two myths. The first is that the economy has done badly and the second is that it has been hurt by deflation.

The first myth comes from judging a country’s economic success by its gross domestic product. Japan has a falling and ageing population. If allowance is made for this, Japan has been the most successful of all Group of Five leading economies. It is the country whose GDP at constant prices per person of working age has grown most rapidly, at least since 1999. Read more >>