James Plunkett

When a growing economy still feels bad

David Cameron was right; the good news has kept on coming. This morning’s first estimate from the ONS puts GDP growth in the third quarter at 1.0 per cent. Cue much justified squabbling over what the ‘real’ number is. A significant portion of this growth will be a one-off, post-Jubilympics bounce-back, suggesting slower underlying growth. As Jonathan pointed out yesterday, ONS first estimates have a margin of error of 0.7 percentage points, meaning that even with these factors built in, the real figure could lie between 0.3 and 1.7 per cent. Gaps of this magnitude are no small matter.

But behind these arguments about the number itself lies a different and in many ways much more politically important question: what will a return to growth actually feel like? The answer depends on a lot of things: what frame of reference do people use when judging how well off they feel? Do people feel mired in debt? Most simply, though, it depends on how growth feeds through into people’s incomes. In fact, once you control for the impact of wars, disposable income growth predicts elections remarkably well.

So here’s the rub: GDP growth isn’t actually all that good a predictor of income growth for ordinary working households. The chart below plots growth in GDP per capita against income growth in low to middle income households for a range of countries over the past 30 years. Of course, countries that grow faster deliver faster income growth. But the link is surprisingly weak. Some countries grow strongly and do poorly for incomes while others grow slowly and do relatively well. This fact becomes even more obvious when you zoom in to sub periods within countries; the thing that divides prosperous eras from gloomy ones isn’t headline GDP on its own, but headline GDP plus other conditions.

Figure 1: GDP per capita and income growth for low to middle income households, US$ PPP

Source: Luxembourg Income Study, calculations by Professor Lane Kenworthy

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