The world is on track to experience its best recovery from a recession in 80 years, according to the World Bank, with the fastest growth since the 1970s. While a strong recovery is something to be welcomed, a rate of growth this high also represents a cautionary note on the interpretation of economic statistics. The record growth rates will primarily reflect not this year’s progress, but rather the disaster of the previous one.
Economic statistics should always be handled with care – economies change as they grow and methodological changes strongly affect the numbers – but the coronavirus pandemic makes interpretation of this year’s data even more difficult. While annual growth rates are usually the best way to tell whether living standards are improving or deteriorating, this year they will inevitably increase as reopened economies contrast with those that are closed.
What economists call âbase effectsâ – how the point at which you start measuring determines how quickly something seems to grow – is likely to play as big a role in determining the data as actual economic performance. This is a purely mathematical artefact rather than the trend for faster growth after a crisis.
Superlative annual growth rates – France is predicted by the IMF to be the fastest growing of the wealthy group of G7 countries in 2021 – will in part reflect a dismal experience during the lockdown. The fact that Japan is near the bottom of the table reflects that it has done a much better job than the Europeans in keeping the virus under control and has therefore experienced a much shallower recession. Measuring from this higher âbaseâ reduces growth. Caught in the round, however, France’s economy will have done much worse.
The best way to judge comparative performance this year is not to compare it to the previous one but before the pandemic. On this metric, the stats will be very different – France will be towards the bottom and Japan closer to the top. Despite the fastest growth rate in almost half a century, the World Bank estimates that the world economy will still be 2% smaller by the end of 2021 than it was in 2019 – compared to the growth of the economy without the pandemic, the picture will be even worse.
Such problems will also hamper attempts to determine whether or not economies are “overheating”. Data on wage growth and inflation – watched closely by central bankers and investors for any sign of price pressure will be skewed by base effects. A skyrocketing US inflation rate to 5 percent in May of this year is in part due to comparisons with a drop in the Consumer Price Index in the same month last year.
Such distortions also affect the labor market. As Gertjan Vlieghe, a member of the Bank of England’s monetary policy committee has pointed out, even if UK private sector wages remain constant over the next year, their annual growth rate will reach 7% before falling back to more normal levels. ‘Composition effects’, as well as base effects, affect the numbers – lowest paid workers have lost their jobs disproportionately during the pandemic, mathematically increasing average wages but not in a way that represents improvements standard of living
For now, the rich world’s economic statistics are skewed by comparisons with the worst months of the pandemic. It is probably inevitable that the political arguments will be too – many will be more concerned with selecting the data that proves their point of view and ignore the caveats – but central bankers or professional investors do not need to be. be misled. It’s always a good idea to study the data thoroughly to determine its significance, but this year it’s more vital than ever.