Measuring the state of the economy during lockdown is tricky - maybe it's time for a rethink.
How is the coronavirus affecting your finances? I think most of us could have a stab at answering this question.
We could look at how our spending has changed, the balances on pension and investment funds, our incomes and how secure we think they might be.
How is the coronavirus affecting the nation’s finances? I think this will be a much trickier question to answer for a long time to come.
In normal times, statisticians collect a lot of data to measure the state of our economy – for example, the rate of inflation, employment levels, wage growth, household debt and house prices.
But in these strange times, it is very difficult to take many of these measurements.
Inflation, for example, is calculated by the Office for National Statistics (ONS) by comparing how the cost of a basket of goods changes from month to month. Statisticians go into shops and look online to find prices for a range of items that represent the nation’s spending habits. But during lockdown, we can’t buy most things we could just a couple of months ago. The ONS must decide – does it chuck once everyday items such as holidays, fuel and leisure out of the basket or keep them in?
House prices are reported every month by the ONS, Halifax, Nationwide and others. But while no one is buying and selling, prices are frozen in time.
The ONS continues to report unemployment and earnings data. However, the furlough scheme likely masks the true impact of coronavirus as many firms will keep employees on for now that may have to make redundancies later on. Will earnings data factor in changes in wages for those who are furloughed? Statisticians must decide.
The impact of Covid-19 on the economy will depend to a certain extent on how we all react. If collectively we remain confident that we can weather this storm, businesses will continue to invest and hire, households will spend once lockdown has lifted, and the economy will continue to crank around and around. If we become fearful, the economy will contract further as spending and investment dries up.
However, it will be tough to predict our reactions.
In normal times, we would look to behavioural economics to help us. It specialises in factoring human nature into economic models. However, its forecasting relies on studies of trends and how people have behaved in the past.
There is no experience remotely comparable to a pandemic in an interconnected world with movement restrictions on half the human population. Of course, there have been recessions and other events to draw on, but it is not hard to see why ‘unprecedented’ is one of the words most commonly used to describe what we are all living through. Behavioural economists are likely to struggle.
You may ask why data matters. Why is measuring important when we can see the impact on individual lives?
One reason is these numbers are used to determine central bank and government policy – which in turn affect all our lives.
The Bank of England’s primary remit is to keep inflation on target, which it does largely by setting the base rate. The base rate affects what savers get on their nest eggs and what borrowers pay on loans. How it measures inflation is crucial.
The Government uses data to keep the economy in optimal health. Data on wages and employment help it calculate what it is likely to bring in in taxes each month – and therefore what it has to spend or will need to borrow. If data is patchy, it makes for less-educated decisions.
While we battle issues with data, it may be a good time to reflect on what we want to measure. After all, what we measure is intrinsically linked with what we value.
Many economists have for some time now pointed out the flaws, for example, in GDP (gross domestic product) – the figure we use to measure economic output. GDP only includes paid work, which means that if children are looked after by their parents rather than others, it will have a negative impact on GDP. I think many parents looking after their children during lockdown would agree that it is work and that excluding it simply because it is unpaid devalues it.
GDP also does not recognise sustainability. Using uncontrolled levels of natural resources looks great in GDP measurements, but terrible in most others.
The virus is forcing us individually to reassess what we value. Our priorities have reset.
It is time to do that collectively too – and crucial to this change will be how and what we measure.
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