This autumn, the United Kingdom’s GDP calculation will get an overhaul. It doesn’t sound particularly thrilling; some very mathematical people double-checking that their statistical tools and methods accurately reflect the state of the world.
This has been done before – 15 years ago, if you’re counting – and caused very little reaction. That may have had something to do with the tech boom at the time; investors weren’t particularly concerned about how GDP was measured when the FTSE 100 seemed set to break through 10,000 and Pets.com was the latest hot listing. Then of course, immediately following the revision, any GDP effects were swamped by the bursting of the bubble.
This time though, GDP figures are being much more closely followed, as investors (and indeed the general public) still don’t seem entirely convinced that the global growth recovery is here to stay. With so much weight (both financial and sentimental) placed on economic data releases, it is probably worth considering the potential impact of anything that affects the numbers.
First, let’s briefly look at the mechanics of GDP, to see why it needs updating at all. GDP is calculated by looking at the total output (i.e. spending) of a country in a certain period of time; which can then be compared against other periods. However, in order to allow for inflation, prices are fixed at a certain year – this means that a simple increase in price won’t change the GDP figure, but a genuine rise in amount produced will. Unfortunately, this means that as new products and industries develop, the base year may not have a comparable price, so any output in the form of these products is missed. Therefore, in order to capture the reality of our current world, occasionally the “price” year needs to be brought up to date to include things that weren’t around in 1999 – mobile apps for instance; all of those hard-earned Pounds spent on Candy Crush!
That logic seems reasonable. So the next point must be to consider what sort of impact these GDP re-calculations can have. The most recent example is Nigeria, which announced the results of this process at the beginning of April 2014. The headline (which you may have seen) is pretty impressive – Nigeria’s GDP jumped by 89 per cent. Eighty nine percent! The original GDP figure for 2013 was $270bn; the recalculation implies that Nigeria is a $509bn economy – the biggest in Africa and the 26th largest globally. Part of the explanation for the magnitude of this increase is that Nigeria’s base year was 1990, so the GDP calculation wasn’t just omitting iPods, it was ignoring both the Telecoms and Information Technology sectors entirely. Clearly these changes can be significant – Nigeria has been attracting investment for the last few years, but can now claim to be a truly important global market.
In 2010, Ghana performed a similar exercise, increasing GDP estimates by 60 per cent, and Kenya is about to do the same next month. It is not only African countries that make these kinds of changes though – last year, the US changed its calculation methodology slightly, and added $500bn to its economy.
