Don’t Take the Numbers Too Literally

by | Feb 14, 2014

Share this article

Beware of mis-interpreting economic data, warns Nick Samouilhan, Multi-Asset Fund Manager at Aviva Investors

deflation

 

Investing, at its heart, requires only two broad steps: a view of where the world is going and a framework to translate this information into a portfolio that meets the needs of the client. How this view of the future is arrived at, and the way it is implemented in a portfolio, can differ substantially between investors. However, one common mistake with regard to the first step is using economic data incorrectly when attempting to understand what is happening to the economy. The main issue is that too much credibility is attached to single economic data releases, which are often treated as fact rather than estimates.

Measuring Economic Growth

Quarterly UK GDP numbers are a core measure of economic output and are typically one of the most important drivers of UK financial markets. While the GDP figures are the best estimate of UK economic output over the quarter, they are not the actual value of output.

Modern economies are simply too large and complex to add up each widget produced and hour worked. Instead, compilers of GDP data take sub-samples of industries and then estimate what is going on with the rest of the economy, based on changes in this small sample. Worse, for the purposes of speed, initial GDP releases (and these are the most widely quoted) are based on an even smaller subset of inputs – the ones most readily and easily measured. This is why revised GDP numbers are released in later months, based on broader samples and greater analysis. The differences between initial and revised releases are often not small.

 

Revising Data Toward Reality

A good example of the need to take economic data with a large dose of salt is the ‘double-dip’ UK recession in 2012 that wasn’t. The initial quarterly GDP release showed that the UK economy had contracted by 0.1 per cent in the first quarter of that year after a brief recovery from recession in 2011 (or ‘double-dipped’). However, the revised figure released much later showed a broadly flat economy during the first quarter.

The upward GDP revision should, frankly, not have been as important to everyone as it was. The economy did not suddenly go from sick-man to rude health on the back of the revised data release. Instead, as the broad swathe of data over the period pointed to a weak but improving economy, the initial GDP figure should have raised suspicions over its accuracy.

 

Focus on the Trend

The broader point is that economic data releases should not be taken as facts, but rather as broad indications of what is going on in the economy. Using releases as single-point facts confers far too much certainty on the numbers.

When attempting to understand a country’s underlying economic health, our advice is to focus on the general direction of a broad set of numbers rather than single releases of individual ones. If the initial GDP number is very different from many others, perhaps showing a weakening rather than growing economy, then don’t trust the initial GDP release too much, it’s probably wrong. 

Share this article

Related articles

Join Jenson at our upcoming EIS webinar

Join Jenson at our upcoming EIS webinar

Your webinar invitationEIS and SEIS: what does the future hold?Thursday 8th December 10-11:30 Join us on Thursday 8th December for an in-depth discussion of the advantages for IFAs and their clients of using the Enterprise Investment Scheme and earn CPD. We will be...

Estate planning is the big opportunity of 2023

Estate planning is the big opportunity of 2023

For professional advisers and paraplanners only. Not to be relied upon by retail investors. Estate planning is something too many families put off. But recent events have made inheritance tax and providing for loved ones a priority. As the cost of living has risen...

Trending articles