Can we trust economic data?
By Kathleen Brooks. The opinions expressed are her own.
China is often berated for providing unreliable economic data. Behind every release there are some who believe officials in Beijing have been at work to manipulate the data for the government’s benefit. But is China alone in this and can we trust the data coming from other economies in the West?
The Office for National Statistics (ONS) has a fairly patchy record at providing accurate data on the UK economy. For example, the first reading of Q2 GDP for this year was -0.7%, this was then revised up to -0.4%. A 0.3% discrepancy in a $2.5 trillion economy is no small chunk of change. The ONS even revealed that the Q2 data was more difficult to calculate than usual due to the extra Jubilee bank holiday and that GDP could be overstating the weakness in the UK economy.
And it’s not just GDP; The UK labour market has left some of the top economic minds in the country bemused. Whereas the GDP data suggests the UK economy is in the first double dip recession for 30 years, the unemployment rate has fallen from 8.3% to 7.9% since the start of this year and the UK economy has been creating jobs at its fastest rate since 2010 (the peak of the recovery from the Great Recession). How can this be? The official data is telling us that the economy is contracting yet we are creating jobs.
Some people now believe the ONS could revise UK GDP over the coming years that could potentially erase the 2012 recession altogether. Whereas China is sometimes accused of overstating its economy, in typical British understated style we could be making things worse than they actually are. If the UK economy is not in as dire straits as the GDP data suggests then imagine all of the wasted investment opportunities in 2012. The ONS’s inaccuracy and inability to account for one extra bank holiday in a quarter could weigh on growth in the future, especially if foreign investment has been deterred by the headline economic statistics that negatively portray our economy as hobbled compared to other regions of the world.
It also has another effect as there are now heightened expectations in the market that Q3 GDP data released on October 25 will be a big number. Some even expect it to be as high as 0.7% or 0.8% — levels of growth not seen since before the 2008 financial crisis. If the economy grows by, say, a respectable 0.4% this could be deemed a disappointment all because the GDP data has been so confusing lately that the markets can’t predict the trajectory of the economy with much degree of accuracy.
It may seem like I am being unfair to the UK, and the inaccuracy of economic data is most certainly not confined just to my homeland. In the U.S. there was a whiff of incredulity when the unemployment rate for September plunged to 7.8% from 8.1% in August. The market had been expecting a rise to 8.2%. This wasn’t just any labour market report; it was the most important report before the November Presidential election. This number could be make-or-break. Prior to the release some analysts were saying that Obama could never win a second term if the unemployment rate was above 8%, now that it is a whisker below this level he has a fighting chance against his Republican rival. The U.S. labour statistics are notorious for very large revisions down the line. Thus, if the unemployment rate is revised higher in the months to come it may have thrown a political election. It could also impact central bank policy as the Federal Reserve has pegged its latest round of quantitative easing to the labour market.
Investors, politicians, business leaders and journalists don’t have the bandwidth or the resources to collect this data and publish their own statistics, thus they rely on agencies in Beijing, London, Washington and elsewhere to give them the most accurate information they need to make large monetary and sometimes social decisions. If that data is inaccurate it could have huge ramifications. It is not just China that might be misleading the world with its statistics; the West may be just as guilty.