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Post-Covid data needs careful handling

The world is set for its best recovery from a recession in 80 years, according to the World Bank, growing at the fastest rate since the 1970s. While a strong recovery is something to welcome, such a steep rate of growth also represents a cautionary tale about interpreting economic statistics. Record-breaking growth rates will mostly reflect not progress this year but instead disaster during the previous one.

Economic statistics should always be handled carefully — economies change as they grow and methodological shifts heavily affect the figures — but the coronavirus pandemic makes interpreting this year’s data even harder. While annual growth rates are usually the best way of telling whether living standards are getting better or worse, this year they will, inevitably, shoot up as reopened economies are contrasted with shut down ones.

What economists call “base effects” — the way the point at which you start measuring determines how fast something appears to grow — are likely to play as big a part in determining the data as the actual economic performance. This is a purely mathematical artefact rather than the tendency for growth to be faster after a slump.

Superlative annual growth rates — France is predicted by the IMF to be the fastest growing in the G7 group of rich countries during 2021 — will partly reflect a dismal experience during lockdown. That Japan is towards the bottom of the table reflects that it did a far better job than Europeans at keeping the virus under control and consequently experienced a much shallower recession. Measuring from this higher “base” reduces growth. Taken in the round, however, France’s economy will have done much worse.

The best way to judge comparative performance this year is not comparing to the prior one but before the pandemic. On that metric the statistics will look very different — France will be towards the bottom and Japan closer to the top. Despite the fastest rate of growth in nearly half a century, the World Bank estimates the global economy will still be 2 per cent smaller by the end of 2021 than it was in 2019 — compared to how the economy would have grown without the pandemic, the picture will look even worse.

Such problems will also bedevil attempts to tell whether or not economies are “overheating”. Wage growth and inflation data — closely watched by central bankers and investors for any sign of price pressure will be distorted by base effects. A surge in the US inflation rate to 5 per cent in May this year, is partly down to comparisons with a dip in the consumer price index during the same month last year.

Such distortions affect the labour market too. As Gertjan Vlieghe, a member of the Bank of England’s monetary policy committee, has pointed out, even if British private sector wages just remain constant over the next year, their annual growth rate will rise to 7 per cent before falling to more normal levels. “Compositional effects”, as well as base effects, affect the figures — lower paid workers disproportionately lost their jobs during the pandemic, mathematically raising average wages but not in a way that represents improvements in living standards

For the moment, the rich world’s economic statistics are distorted by comparisons with the worst months of the pandemic. It is probably inevitable that political arguments will be as well — many will care more about selecting the data that proves their point and disregard the caveats — but there is no need for central bankers or professional investors to be misled. Investigating the data thoroughly to work out what it means is always sensible but this year it is more vital than ever.

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