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The world is ready for the best recovery from a recession in 80 years, according to the World Bank, is growing at the fastest pace since the 1970s. While a strong recovery needs to be recognized, such a strong pace of growth also represents a precautionary account of the interpretation of economic statistics. Record growth rates will be reflected primarily not in this year’s progress, but in the disaster during the previous one.
Economic statistics should always be treated with care (economies change as they grow and methodological changes greatly affect the figures), but the coronavirus pandemic makes interpreting this year’s data even more difficult. While annual growth rates are usually the best way to know if living standards are improving or getting worse, this year they will inevitably skyrocket as reopened economies contrast with closing ones.
What economists call “base effects” (the way the point at which you start measuring determines how quickly something seems to grow) is likely to play as important a role in determining data as economic performance. real. This is a purely mathematical artifact rather than the tendency for growth to be faster after a fall.
Superlative annual growth rates – The IMF predicts that France will be the fastest growing in the G7 group of rich countries during 2021; it will partly reflect a sad experience during the closing. The fact that Japan is at the bottom of the table reflects that it did a much better job than the Europeans in keeping the virus under control and as a result experienced a much smaller recession. Measuring from this higher “base” reduces growth. Taken in the round, however, France’s economy will have gone much worse.
The best way to judge this year’s comparative performance is not to compare it to the previous one, but before the pandemic. In this metric, the statistics will be very different: France will be at the bottom and Japan closer. Despite the fastest growth rate in almost half a century, the World Bank estimates that the world economy will still be 2% smaller by the end of 2021 than in 2019, compared to how the economy would have grown without the pandemic. the image will look even worse.
These problems will also cause any individual’s attempts to indicate whether the economies are “overheating” or not. Data on wage growth and inflation, closely monitored by central bankers and investors for any signs of price pressure, will be distorted by the base effects. A US inflation rate rises to 5% in May this year, it is reduced in part to comparisons with a rise in the consumer price index during the same month last year.
These distortions also affect the labor market. As has Gertjan Vlieghe, a member of the Bank of England’s monetary policy committee pointed out, even if British private sector wages only remain constant over the next year, their annual growth rate will rise to 7% before falling to more normal levels. “Compositional effects”, as well as the basic effects, affect the figures: lower paid workers lost their jobs disproportionately during the pandemic, mathematically raising average wages, but not in a way that represents improvements in living standards.
For now, the economic statistics of the rich world are distorted by comparisons with the worst months of the pandemic. It is likely that there will inevitably be political arguments as well (many will care more about selecting the data that proves their point and ignoring the warnings), but central bankers and professional investors need not be fooled. Thoroughly researching the data to find out what it means is always sensible, but this year is more vital than ever.
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