Why aren’t Australians celebrating the highest economic growth figures in the developed world and among the highest in the region? Australia has an annual growth rate of real gross domestic production of 4.9 per cent, according to figures issued by the Australian Bureau of Statistics this week. This is substantially higher than was predicted a year ago. The figure should be welcomed as a very good economic result, but the share market and the dollar went down on the day of the announcement and unemployment is still expected to rise in the next few months. So there has been little celebration in either the financial markets or in the community at large.
The only celebration has been by the Government, in particular treasurer Peter Costello who described the figure as “”extraordinarily strong”. But we have come to expect governments to put the best gloss on whatever economic statistic is issued by the bureau, similarly we have come to expect oppositions to make them as gloomy as possible.
There are several good reasons for the lack of celebration in the financial markets and the wider community. The first is that GDP is not a perfect yardstick for economic growth. Secondly, it is not a good yardstick for improved well-being. Thirdly, GDP does not record the state of equality and equity within society.
GDP measures production. The trouble with the latest figure is that although production has increased, so have inventories and stocks. So companies have produced 4.9 per cent more, but they have not sold 4.9 per cent more. In fact consumption has remained flat and exports have fallen in the last quarter. So the figure is misleading. It is likely that in the next six months companies will not be able to move their increased stock and will slow production. The Asian economic downturn is particularly unnerving. The growth figure disguises the effect of the Asian downturn. It is likely their will be a delayed effect as companies selling in to Asia find it harder to move their stocks. It also means that without sales, companies will not be taking on more staff, so employment will remain weak.
The second drawback of GDP as a measure is that it is not a measure of total well-being. So if GDP rises, there may not be any cause for celebration. GDP measures only measurable production. It can only include things which have monetary value. It excludes unpaid work, for example. So the well-being generated by work within the family is not included. It excludes matters of non-economic well-being like clean air and open space. Indeed, the reverse is true. GDP is added to when, for example, cars are smashed and repaired, or people get ill and require medical services. It may well be that as GDP increases well-being falls as people go to work but do less unpaid work in the family or for charity; more production goes in to repair; and more production at the expense of the environment.
Also, GDP might increase a lot but the distribution of the wealth gets more uneven. The top half might get more and the bottom half get less, decreasing the sense of well-being of half of society without substantially changing their sense of well-being being of the other half. Indeed, the greater inequality might increase a sense of unease in society even though overall wealth has increased.
The lesson is that we should not become too reliant on economic statistics to inform us about the state of our society, and we should certainly treat with great scepticism the interpretation of those figure by our political leaders.