The Gross Domestic Product (GDP) has long been considered one of the most important measures of economic wellbeing. It is the broadest measure of the total value of goods and services produced in every sector of the economy.
United Kingdom
In the United Kingdom, the Office for National Statistics (ONS) publishes figures for GDP on a monthly basis. They stress the importance of quarterly data which provides a better, more holistic snapshot of the country’s economic in- and output. The latest quarterly GDP estimates for the UK published last week confirmed the picture with growth stagnating at just 0.1% between July and September. This comes on the heels of a full 0.3% of other quarterly growth, realized just last quarter.
GDP includes all private sector and public sector activity—farming, factory, feedlot, firm, schoolhouse, and statehouse. The value added created by each of these sectors indicates the state of our economy and measures the economic output, or what our economy is producing. The measurement of GDP can be approached in three distinct ways: Output, Expenditure, and Income.
Output:
Output measure to determine the value of units produced includes value of goods and services produced by all sectors. This is a better approach because it gets at the true productive capacity of our economy. Meanwhile, the Expenditure measure evaluates the total value of goods and services purchased by households and government entities, alongside investments made in infrastructure and machinery. This includes exports minus imports to provide a better picture of economic activity within our borders.
The Income measure is based on the income that derives from profit and wage creation in the economy. This approach uncovers how much money is flowing between people and businesses. On a positive note, it provides another prism of insight into our economic health.
The ONS measure of GDP is an unusual one, as it combines all three calculations into one. This method ensures that we see a comprehensive picture of economic activity. As you can imagine, early estimates often depend on the Output measure, using data that has been collected monthly from tens of thousands of companies across the UK. This new approach allows for quick assessments. The UK is unique in producing one of the fastest GDP estimates of any major economy, releasing around 40 days after the end of the quarter.
Such strengths aside, recent figures show a very troubling trend. The UK economy expanded by 0.3% in the three months to June. The true measure of growth is that it actually contracted by 0.1% in September alone. Analysts had been predicting a growth rate of just 0.2% for the third quarter, from July through September. The real number shocked at a measly 0.1%. Even more concerning, because two quarters of negative GDP growth can often be a precursor to a recession, this sudden turn is doubly alarming.
Recessions are typically characterized as a period of extended, drastic economic downturn and may result in higher unemployment and lowered consumer expenditures. Therefore, economists and policymakers watch GDP trends carefully to determine conditions of economic stability and make long-term strategic decisions.