Next month it will be official. Figures will provide the first estimate of by how much the UK economy shrank in 2020. Depending on what happened when lockdown restrictions were temporarily eased in December, the likelihood is that there was a fall of about 10%.
That will be the signal for all sorts of comparisons. Germany, which has already released data, contracted by 5% last year. Numbers for the US are not yet out but will probably show the world’s biggest economy suffered a 4-5% drop in gross domestic product. China grew by about 2%.
Historically, 2020 was a real stinker for the UK – the worst since 1709 – the era of Isaac Newton, the Duke of Marlborough and Daniel Defoe. Be ready for pictures of a frozen Thames to illustrate the 15% collapse of the economy caused by the Great Frost.
Does any of this matter? Looking back to the early 18th century is fun, but it was a different world back then. The UK had a population of 5 million in 1709 and the economy was largely agrarian. A 10% contraction in GDP in 2020 effectively wipes out a decade and a half of growth. A 15% drop in 1709 meant people starved to death.
There are not that many memorable speeches about gross domestic product but that may be because the one made by Bobby Kennedy while on the campaign trail in 1968 said it all.
As Kennedy pointed out, the production of napalm and nuclear warheads counted towards GDP but the health of American children and the joy of their play did not.
“It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.
“It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans.”
Those words were true in 1968 and they resonate even more strongly today. Measured by GDP, the US is the world’s richest country. Measured by GDP per head it is one of the richest. Measured in other ways, in life expectancy for example, the US would be a long way down the international league tables. As recent events have shown all too clearly, it is not a country at ease with itself.
Over time, people get smarter and find better ways of doing things. When economists talk about productivity they mean that more goods and services can be delivered with less effort. Countries reap a productivity dividend which can be taken in different ways: they can produce the same amount of stuff and have more leisure time or they can work the same number of hours and produce more. Most European countries have tended to opt for the first option, the US for the second. Britain falls somewhere between the two.
GDP measures those activities for which money changes hands or for which a monetary value can be attached. Paid childcare is included but unpaid childcare by family members or friends isn’t. If the NHS needed to do more operations because Britain was becoming a less healthy nation that would add to GDP. If the number of operations went down because the public exercised more it would reduce GDP.
All of which brings us back to Bobby Kennedy. What the GDP figures tell us is that the economy collapsed between late February and April, then began a recovery that picked up pace during the late spring and early summer. From then onwards, the pace of growth slackened as restrictions were tightened, culminating in a fresh fall in national output of 2.6% in November.
But because they are a quantitative measure, the GDP figures don’t tell us anything about the quality of growth. To take one example, retail sales are now higher than they were before the pandemic started even though non-essential stores have been shut on and off for much of the past year. We know that spending has migrated from the high street and retail parks to online: what we don’t know is whether the goods being delivered by courier are really wanted or whether people are so miserable they are binge buying.
At present, there is much speculation about whether the UK will experience a double dip recession – two separate episodes in which GDP falls for two or more quarters in succession. This is probably not going to happen but even if it did it would matter much less than some of the harder to quantify damage caused by the pandemic.
The collapse in GDP is huge but – unless there are fresh waves of the pandemic – only temporary. Once the restrictions on activity are lifted, activity will pick up. If things go well, all the ground lost in 2020 will be made up by 2022. But how do you measure the impact of the schools being shut on the life chances of a child from a disadvantaged family? What price the toll taken on mental health of people confined to their homes and unable to see friends and family for months on end? Is it possible to put a monetary value on loneliness and depression?
The fact that in recent years statisticians have tried to judge progress in different ways speaks volumes about the limitations of GDP as a yardstick. There are things that can be easily measured and things that can’t. The fact that GDP fell by 10% last year tells us something but not everything.