The UK economy contracted by 0.2% in the quarter to June 2019, the first time since 2012 that GDP has fallen, but a clearer gauge on the impact of this can be seen by viewing it on a ‘per person’ basis, according to research by the Money Charity.
Gross Domestic Product, or GDP, is the most commonly used of a number of measures of the size of an economy as a whole. While it has a number of well-known issues (such as measuring both ‘bad’ industries and ‘good’ ones, not measuring a number of essential societal roles such as care work, and not counting the environmental impact of the economy), it does follow internationally agreed conventions on measuring economic output, ensuring comparability across different countries and time periods. Some commentators argue though that ‘growing GDP’ should not be the main goal of economic policy and there are more important things to pursue such as wellbeing, sustainability and a fairer sharing of income and assets.
However, measuring GDP does tell us something about the state of the economy. If employment and productivity are growing, we should see GDP going up. If GDP goes down, then either there are fewer jobs or we are working less productively. GDP does not though take into account population changes; at equal levels of productivity, a country with a big population has a larger GDP than one with a smaller population. If our population and labour force grow, then GDP goes up. But the size of total GDP doesn’t matter to the individual person. What matters to them is how big their income is, and how many things they can afford to buy.
From this point of view, a better measure of our economy would be GDP per person. This would also be a better way of comparing the GDPs of different countries. Over the last twenty years, the UK has had a growing population, which has helped lift the level of GDP. But what has happened to GDP per person?
According to ONS data, GDP per person has risen considerably decade-on-decade since the 1950s with dips due to recessions in the early 70s, 80s and 90s, followed by the credit crunch in 2008-09. Overall, the GDP per person grew by between a fifth and a third per decade, raising the UK’s living standards well above historical levels. However, in the latest decade, since the credit crunch, overall growth dropped to 5.6%. This is the background against which the Q2 fall in GDP should be viewed. In Q2 2019, GDP per person fell by 0.35%, compared to the overall 0.2% fall, with the difference between the two numbers reflecting the population increase.
Erik Porter, Acting Chief Executive of The Money Charity said “While we aspire towards financial wellbeing for the whole of the UK, we know well that that means helping every individual to understand how they can develop a positive relationship with their money, getting to grips with it so they can achieve their goals.”
“That’s why throughout our work, and especially in The Money Statistics where we seek to give a clear monthly picture of the UK’s finances, we look to express things both with a big-picture perspective as well as an insight into the impact on every individual.”