Real GDP may be higher than statistics imply, says LGIM
Growth and inflation statistics are becoming harder to measure, as a result of the positive effects of new digital services, discount stores and the sharing economy, according to Legal & General Investment Management (LGIM).
In today’s Fundamentals briefing, LGIM economist James Carrick (photo, right) looked at how growth is measured and found that real GDP and living standards are probably higher than assumed:
“Advanced economy labour productivity growth remains puzzlingly weak. But we believe statisticians are failing to capture the revolution in distributed networking and cloud computing.”
LGIM estimates that real GDP growth could be underestimated by around 0.5% with six areas contributing to the mismeasurement. Among the most prominent areas of bias are software price mismeasurement, particularly due to the rise of cloud computing and cheap or free digital services.
“Statisticians assume little productivity in software but we think this underestimates ‘real’ growth in the capital stock of software,” James continued. “Take banking for example. We no longer need to go to a physical branch to undertake transactions, but can transfer money using phone apps.
“The ONS only captures the indirect effects from the rise of discounters as supermarkets cut their prices to match. But they don’t capture the direct effect of the households switching to cheaper stores.”
Higher-than-estimated living standards and lower-than-estimated inflation could have knock-on implications for central bank policies.
James commented: “This is not simply a matter of statistics; it could have fundamental macroeconomic and market consequences. For instance central banks may need to re-think monetary policy guidelines if actual inflation is lower than reported and growth is higher.”
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Legal & General Investment Management
Legal & General Investment Management is one of Europe’s largest asset managers and a major global investor, with total assets of £717 billion*. We work with a wide range of global clients, including pension schemes, sovereign wealth funds, fund distributors and retail investors.
Throughout the past 40 years we have built our business through understanding what matters most to our clients and transforming this insight into valuable, accessible investment products and solutions. We provide investment expertise across the full spectrum of asset classes including fixed income, equities, commercial property and cash. Our capabilities range from index-tracking and active strategies to liquidity management and liability-based risk management solutions.
*as at 30 September 2015, total assets include assets under management, notional derivative positions and advisory assets.