GDP increase slows, but so what?!

Nov 15, 2015 | Tony Byrne's View

The Office for National Statistics’ forecast for GDP for the third quarter of the year noted that growth slowed from 0.7% to 0.5%. But what does this mean, and should you be worried, happy, sanguine or are you just confused?

Every government wants to grow the economy. A growing economy means that government debt falls in proportion to the size of the economy. It also means that the tax received increases, again producing more money for the government to use (or misuse, depending on your view). The fall from 0.7% to 0.5% is of no great concern, certainly when we look at what is happening around the world. Although no other G7 country has yet released its third-quarter figures, it is unlikely that any will have our level of growth. Of course, the falls in China’s GDP a couple of months ago caused a fall in stock markets around the world. We should not be concerned too much with this as, while annoying, it was still a temporary effect.

The slowing of China’s GDP growth is, in the long term, a good thing. The world simply cannot sustain growth at this previous level; it could, however, sustain growth of 1-2%. There is only so much ‘stuff’ in the world. With the exception of intangible assets, there is only so much coal, oil, steel, etc. There may be a great deal left, but a 5% increase based upon a population of say seven billion is much greater than a 5% growth based on four billion people. In a perfect world we believe a level and steady growth of 1-2% in the world GDP is sustainable and would lead to reasonable increases in living standards all round.

Therefore, moving closer to this level is generally good news. The by-product of this is that falls in the growth of GDP will push increases in interest rates further away. If something similar occurs in the USA, we can expect interest rates to stay where they are for at least another six months.

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