Economic environment - GDP

Data from Timetric.To view this graph, please install Adobe Flash Player. UK GDP Statistics from Timetric

The most watched economic indicator is GDP. But why? What is GDP and why does it seem to be so important?

Economists are keen to measure the rate of economic activitity, and GDP is that measure. If you were looking down on the economy from above you could measure this is three ways:
- look to see what is being produced, and measure it being sold (meaning anything that’s sold as output = GDP)
- look to see what people are spending (see above). Everything that is sold has been bought, so you could measure GDP by total expenditure.
- all that expenditure ultimately ends up in someone’s pocket, so equally well you can say that GDP is a measure of total income.

For more detail you could read What is GDP - BBC or watch this BBC video clip.

That’s the beauty of GDP - it’s helpfully measuring three things at once. And all of those three things might be a cause of anxiety in the current climate! Numerous web resources are geared up to talk you through the highs and lows of recent GDP change and what it means for the business environment. As a quick sample there’s The Guardian guide to Britain’s highs and lows or the BBC economy tracker. The Guardian also have an interactive recession guide or you can look at the Economist’s European perspective on all this.

It’s a very big topic, and one that can only be skated over here. Some points you might like to take away include:

- As with the first graph, the average rate of GDP change conceals differences in the output patterns of some industries. Over the long term, manufacturing growth has been slower than the average. That means it makes up a smaller proportion of the economy than it used to. Services have grown faster than the average, which explains why they dominate the modern economy.
- In recent years, expenditure has been driven by massive expansion in consumer expenditure and government spending. But they are not the only motors of demand (and they are unlikely to recover any time soon - this is a huge concern for the High Street - Mary Portas is heading a government review looking at what can be done to revitalise the High Street). Instead, the UK government is hoping to find more expenditure coming from business investment and exports.
- Worries about high salaries, bonuses and profits are unlikely to go away. We’re all interested to see how income will be distributed and to see if a disproportionate share of this income continues to go to the relatively well off.

But the biggest question of all for business is probably ...... what will happen next? A ‘double dip’, strong recovery ..... or something else?

Financial planning in an uncertain world