What GDP can and cannot tell you about the post-pandemic economy

What GDP can and cannot tell you about the post-pandemic economy

Third-quarter figures are dramatic, but need careful interpretation

Pity the world’s chartmakers. For years, normal economic fluctuations will be dwarfed by the extraordinary gyrations of 2020, such as the third-quarter gdp figures that are now rolling in. These data are informative—measures of output today are in part a reflection of governments’ success or failure in controlling the spread of covid-19. Yet they can easily mislead, and should be treated with care.

This year’s gdp figures pose a number of interpretative challenges. In America and Japan, for instance, statisticians present gdp growth compared with the previous quarter as an annualised rate, indicating how much an economy would shrink or expand if its performance in the relevant quarter were sustained for an entire year. As economies have swung into and out of lockdowns the practice has yielded numbers that are astonishing and misleading in equal parts. Real gdp in America shrank at a reported annualised pace of 31% in the second quarter, seeming to suggest that covid-19 swallowed nearly a third of America’s economic output. In fact, production in the second quarter was 9% below that in the first—still staggering, but quite a lot less dramatic.

Simple mathematics adds to confusion. On October 29th the Bureau of Economic Analysis reported that American GDP rose at an annual pace of 33% in the third quarter, compared with the second. The rate in this case is doubly misleading. Output rose by just 7.4% from the second quarter to the third. Though the third-quarter rise is larger, in absolute terms, than the second-quarter fall, the fact that the third-quarter growth rate took place from a pandemic-diminished base of output means that American gdp will still be nearly 3% lower than it was a year ago.