Dod101 wrote:I confess not to understand how GDP is calculated but if stopping mass testing for Covid reduces GDP (and yet we set so much store by it) then it is time the definition was changed. At a time of big labour shortages, in my naive view of life I would have thought releasing people from non productive jobs would have been a positive. Instead it seems to be a sign of a looming recession.
GDP is a highly flawed measure of the economy. Stopped mass testing for the coronavirus caused GDP to fall because by definition government spending adds to GDP. So cutting a major item of state spending will cut GDP.
IMHO there's probably going to be a recession according to GDP, but there will be a partially or fully offsetting increase in domestic economic output to compensate (DIY projects, substituting eating in for eating out, etc.). Unfortunately domestic production doesn't appear in the GDP figures and there will be major policy errors as a result. As to investments, the recession is being priced in now (and may already be in the price).
My investments; I've trimmed a few holdings and put most of the proceeds into recession-resistant stuff such as alcohol (Diageo), farmland and Canadian banks, plus a small punt on Patria Investments which essentially is a South American version of Blackstone. I currently have 30 months worth of expenses on deposit and will treat most of this as money to be invested if anything appropriate appears on my investment radar.
Anyway, here's a bit about how flawed GDP is as a measure of the economy. This might be of interest to some (I wrote this recently in an email to a friend, the key bits are cut and pasted here).
GDp is a highly flawed measure of the economy. A major contributor to the recent fall in GDP was that the government stopped mass testing for the coronavirus will cause GDP to fall. By definition government spending adds to GDP, so cutting a major item of state spending will cut GDP. It matters not how effective the spending is (at least initially, because there will be knock-on effect which appear in later GDP calculations). If the money had instead been spent on paying people to dig holes and build buildings, then then paying them to fill in the same hole and burn down the buildings then GDP would not have fallen.
The Soviet Union became an expert at producing things which ended up in the GDP statistics, yet were of little or no economic use. I suspect that China has been doing much of the same, which is being revealed with a series of local bank runs in China. This is receiving very little attention in the western media. Reported last week:
"There’s a run on Chinese banks and it’s being ignored by the world"https://www.asiamarkets.com/chinese-banks-run/Unfortunately GDP dominates the macroeconomic conversation, as e politicians latched onto it as a way of making themselves look good. GDP measures what can be measured and what can be measured doesn't exist for GDp purposes. But because a lot of economic activity cannot be measured, or it's too much hard work to estimate it, GDP underestimates the total economic output by a substantial amount.
When it comes to domestic production (what the economist Gary Becker called "Z-Goods"), because domestic output is not a monetary transaction it does not add to GDP. If I pay you to do some work for me and then you pay me to do some work for you then this adds to GDP. But if we both do the work ourselves then this does not add to GDP. The end product is the same, yet the contribution to GDP isn't.
GDP is hopeless when dealing with product improvements, which don't appear in the statistics unless the improvement results in a change in price. A better product at a lower price is good for consumers but very bad for GDP as it causes GDP to fall. GDP is highly flawed when measuring inventories, intermediate goods and other work-in-progress (link below, it's a heavy bit of reading). Many "free" internet services, such as Facebook and Google Search, contribute nothing to the GDP in themselves because the user doesn't pay with money (they pay with data).
"Significant flaws in how GDP is measured, however, not only make it a misleading indicator, but have led to erroneous conclusions about what makes the economy tick. Such errors lead to extremely costly and damaging public policies."https://mises.org/wire/why-bad-gdp-metrics-lead-bad-policy"GDP purports to measure economic activity while largely divorcing itself from the quality, profitability, depth, breadth, improvement, advancement, and rationalization of goods and services provided."https://mises.org/library/how-gdp-metrics-distort-our-view-economyOverseas trade is also a bit weird. Ireland in particular has serious problems with its GDP calculations because it includes a huge amount of transactions between the subsidiaries of multinationals which don't turn up in the Irish domestic economy. It's known as "Leprechaun Economics" and is largely responsible for making lots of people think that the Irish are far better off then they really are.
"The “real feel” in the Irish economy has never quite matched the eye-watering growth numbers that tumble out each year."https://www.irishtimes.com/business/economy/we-re-not-as-rich-as-we-have-been-told-to-think-we-are-1.4476247