Economic data: error or truth?
Financial analysts, rating agencies and national governments are often obsessed with analyzing the next set of economic data, especially the highs and lows of GDP – a key macroeconomic indicator – which usually reflects the health of a economy.
The reason for this obsession is that many local investment decisions and those that generate other foreign direct investment are based on GDP data, as it is a common indicator used by international investors to judge the performance of a country. Geopolitical factors and country risk are also important indicators that are also taken into consideration.
GDP figures are usually published as interim quarterly data and final annual figures, after subsequent revisions. A “good” GDP figure grabs the headlines, even if the change is only 0.2 or 0.3% higher than the previous quarter’s figure. For large economies, the smallest differences can compound a large difference in national income over time.
As many economists can attest, measuring GDP is a complicated process because data is collected from various sources, official or third-party international agencies, such as the International Monetary Fund, if national data is not available. .
This uncertainty about the veracity of the data and their sources, and the fact that GDP is only one of the means of measuring the state of health of the economy, causes a debate on its use, certain data being collected from a regular basis while others, such as agricultural production or retail sales, experience strong seasonal variations. For example, accurate quarterly GDP data backed by strong retail sales during the holiday season is not a good indicator of the trend in the overall economy.
GDP data does not take into account the qualitative improvement of goods, it only includes the value of manufactured products. Other issues are definitional, as some financial products, such as fees charged for advisory work or bank overdrafts, can be more easily reported, while trading activities, such as derivatives, are more complex.
Economists are divided on the categorization of several economic activities, such as whether to include unpaid housework in GDP calculations, including home care for the elderly or childcare. These economic activities do not add up in monetary terms but make an immense contribution to the well-being of society.
As tempting as it is to have a single indicator summarizing whether things are improving or deteriorating in economic terms for society as a whole, GDP figures cannot do this as they only measure the monetary value of goods. and services over a period of time and do not indicate the state of happiness and well-being of society.
Even though income and purchasing power are major concerns, people are increasingly willing to sacrifice their financial situation at the expense of a sustainable future, which contains intangible goals such as air quality and the balance between work and private life.
The loud voices advocating a balance between an environmentally friendly lifestyle and economic growth at the recent COP26 climate meeting in Glasgow testified to this growing public mood.
The need for sustainability introduces a set of trade-offs between choices that will improve current living standards and choices that will preserve future living standards, and if translated at the policy level, policy makers must take note of these national preferences.
It is no coincidence that surveys of happiness levels in high GDP countries show low societal happiness, compared to poor countries with higher levels of citizen happiness. It could simply be that being economically poorer but having a stronger sense of community is more important to these societies than being financially well off.
This is, however, an idealistic assumption. Some countries, like India, and particularly China, have aggressively pursued double-digit GDP growth to lift millions of their citizens out of poverty and into more comfortable economic environments.
So the next time national GDP data is rolled out, it is important to raise some of the questions above and move beyond the data. Rating agencies should also take these non-economic considerations into account in their final country ratings, but that is another story.
• Dr. Mohamed Ramady is a former senior banker and Professor of Finance and Economics at King Fahd University of Petroleum and Minerals, Dhahran.
Disclaimer: The opinions expressed by the authors in this section are their own and do not necessarily reflect the views of Arab News