LGIM economist James Carrick 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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