UK GDP

3rd August 2014

The news in July 2014 that the UK’s GDP (Gross Domestic Product) has returned to the level it was in the second quarter in 2008 sees an end to The Great Recession. As we leave what has been a particularly long and severe recession there are a few observations worth making about GDP.

Firstly GDP calculations are inherently flawed in that they are based on limited information which goes out of date very quickly. Further the calculations do not distinguish between beneficial and worthless activity.

Secondly, GDP growth is very hard to predict, even in the short term. It was only last year that the head of the International Monetary Fund, Christine Lagarde warned the UK that its growth was not good enough and her organisation’s chief economist Olivier Blanchard, urged the UK to rethink its “austerity policy” in the face of continuing weakness in the economy. A year later only Germany can rival the UK’s economic recovery amongst a Eurozone that is teetering dangerously close to deflation.

And finally stock markets and GDP have little correlation – the majority of the FTSE 100’s earnings are derived overseas and are dependent on the world’s GDP rather than on the level of activity within the UK economy.

However, despite its inherent flaws and criticisms GDP remains the best measure of judging an economy’s health, so we are stuck with it as a crude measure of the country’s wellbeing for some time yet.

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