One of the great challenges of Monetary and Fiscal Policy is knowing exactly where the economy is.
If output is falling, then this justifies an easing of monetary policy (lower interest rates, or in the UK’s current situation more quantitative easing). Recently GDP statistics showed an unexpected 0.4% fall in GDP. This was a key factor in encouraging the Bank of England to extend its policy of quantitative easing (creating money to buy more assets like gilts).
However, many are questioning whether the GDP statistics are correct. If GDP is not falling, but actually increasing, then the policy of extending quantitative easing could be damaging to the economy (e.g. create inflationary pressure, or another bond bubble)
Previously, the ONS has often later revised GDP statistics (quite often this involves revising them upwards. Though this year the ONS revised GDP to show a fall of 2.5 per cent from January to March — compared with an earlier reported decline of 1.9 per cent.). It seems that the ONS has difficult in calculating the size of the service sector, data is harder to collect here than it is in manufacturing.
But, whilst it is fine to revise statistics, you can’t change policy decisions.
One solution to this problem of incorrect statistics is to use a wider basket of statistics than just GDP. For example, some economists are pointing to
- slowdown in unemployment growth
- Improvement in Purchasing Managers Indices (Very accurate in predicting recession)
- improvement in consumer confidence
- Growth in manufacturing output
- Rise in house prices
Taking a wider look at the economy gives a better perspective and means policy will not be affected by one misleading statistic.
Nevertheless, it is not a huge concern. Though there are signs of recovery, it is from a very low base. GDP statistics may be better than the ONS state, but, I hardly feel inflation is becoming a pressing concern. GDP has still fallen over 6%.
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