Finance

Why your business shouldn't focus on low GDP growth

UK GDP growth stood at 0.5% for the third quarter, down slightly, but good enough to calm fears of a post-referendum panic. Here’s why your business shouldn’t care either way.

Until quite recently, the average person would judge the state of the economy by the fluctuations of the FTSE 100. Alongside the sterling’s strength, it’s one of those rare statistics that’s reported in every Radio 4 news broadcast. 

It’s nonsense, of course. It was ridiculous to judge the health of the economy by its top listed companies even when they were a true reflection of British business. Now that the FTSE 100 constituents earn about three-quarters of their money overseas, it’s even more bogus.

The FTSE 100’s foreign dominance is so complete that it’s more of a measure of the currency markets rather than domestic industrial robustness. That’s partly why over the years GDP has seeped so much more into the public consciousness. “Economic growth”, measured in GDP data creeping one way or the other, has become the defining political mantra in a way it perhaps wasn’t 40 years ago.

(Evidence? Google Ngram, which looks at the frequency of appearance of phrases across the English corpus, only sees “GDP growth” ticking up in the late 1980s.)

 

 

The Office for National Statistics (ONS) release of its Q3 2016 GDP data has grabbed a lot of attention. Half a percent growth is… OK. (Which means: growth was not as bad as expected.) Brexit supporters see it as proof that Project Fear was all too real. The smarter analysis, however, offers potentially worrying signs. For example, manufacturing is down 1%; construction has slipped, and only the services industry is picking up the slack.

But even this deeper dive is pretty moot for most companies. Of course, macro-economic effects and even sector trends aren’t meaningless. But businesses are part of those trends; they aren’t simply pushed along by them. Your decisions about market positioning, product innovation, efficiency and company structures are based on a host of factors, not just a crude statistic.

Example: the iPhone launched the year the credit crunch hit – a year before Lehmann Bros went bust and we entered a recession. And Apple’s done OK (see chart below).

 

 

 

 

 

 

 

 

 

We tested the theory at a conference when all was doom in early 2009. We asked a room full of finance directors who among them was confident in increased sales for the year. About a third of hands went up. Your business matters more than macro stats.

It’s worth listening, then, to the IFS’s Paul Johnson and Voltera Consulting’s Bridget Rosewell discussing the GDP announcement on Radio 4’s Today programme (their bit starts about ten minutes from the end). Both are critical of an over-reliance on GDP as a measure of how the economy is doing. Rosewell, in particular, thinks slavish attention on stats is not only pointless but actually foolish. It diverts us away from the job of driving better decisions about business and society. (The Economist offered a similar critique earlier this year, focusing on the terrible way the data is collected.)

It might be going a bit far to suggest we junk GDP in favour of a happiness index (as has the government of Bhutan). But for your business, turning off the headline-grabbing metrics – FTSE 100, GDP growth, inflation and the rest – might be a great way of making clearer decisions about investment, innovation, and efficiency that are rooted in facts on the ground, not sentiments and stats.