What rising GDP means for you

Updated: 

Seedling

There has been some great news on the growth front. The latest GDP figures show that the UK economy grew by 0.5% over three months. Although it's not going to transform the fortunes of the country, it's not the double-dip that everyone has been talking about.

But what does it actually mean?

The good news

GDP tells us what's going on in the economy. If GDP is growing robustly, then buyers and businesses are confident. Businesses invest, employment is secure and buyers consume more. If GDP is flat, or contracting, it means we are making and selling less. Businesses and individuals lose their confidence, we buy less, so we make less and people start to lose their jobs.

The most recent figures were cheering to a certain extent, because it reflected a pick up in the service sector between July and September. This 'pick up' can only mean that individuals and businesses were spending more.
So we should care about GDP figures, which show us what our confidence level is like and whether we are likely to keep our jobs.

Except it's not quite that straightforward.

The bad news

First off, growth isn't always due to underlying strength. It is affected by all sorts of other things. We had a terrible period between March and May this year because of the Royal Wedding holidays and disruptions to the supply chain caused by the Japan earthquake and tsunami. The subsequent positive figures were partly a result of pent up demand. Some estimates predicted that this demand-in-waiting would be responsible for 0.5% growth. It means that all other things being equal, we would have seen a three month period where the economy was going nowhere.

Lurking horrors

Second, it's an overall figure, and when you break it down to different sectors there are all sorts of horrors lurking - including a shrinking construction sector. Firms in this business tend to look further ahead, because they are building for the demand they see in six months' time. And it looks very much like an outbreak of pessimism has hit construction.

Looking back

Third, it tells us about consumption and growth between June and September. We know that looking backwards things are not as bad as we had feared. However, looking forwards things look altogether more dismal. The decline in manufacturing last month, for example, does not bode well, especially as new orders are at the sort of levels we saw in the depths of the recession. Meanwhile separate data on small business confidence shows it at rock bottom. And there is bound to be a knock-on effect from the European crisis.

In fact, most commentators think that the economy is shrinking at the moment, and that when GDP data comes out for the end of the year we'll be in negative territory. The old adage applies that you can't tell where you're going by looking in the rear view mirror.

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