David Prosser: Has the economy done better than we think?

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The Independent Online

Outlook Here's something that might give the Chancellor a bit of unexpected cheer. A paper from CapitalEconomics, the respected think-tank, suggests that Britain's gross domestic product may have been under-reported during the recession. It could be that GDP over the past two years was up to 10 per cent higher than the official data indicates.

The arguments include the fact that unemployment has risen much more slowly than one would expect had the economy performed in the way the statistics suggest. So too have mortgage arrears. Import growth rates, meanwhile, suggest domestic demand has been under-reported, and then there is the stubbornly high level of inflation, which ought to be lower if there is as much spare capacity in the economy as the data suggests.

That's the case for the prosecution, so to speak. On the other hand, there are possible explanations for these discrepancies – labour market flexibility and low interest rates, for example – as well as other evidence which supports the official data, such as falling house prices and disappointing business confidence surveys.

In fact, Capital Economics thinks the data is more likely to be accurate than not. Still, even small upgrades to GDP would give the Chancellor higher tax revenues and lower borrowing figures than expected (though they might also suggest the Bank of England has underestimated the inflation risk).

Note, however, that the Capital Economics paper refers to GDP statistics over the past two years. There is still every reason to think that the data for the fourth quarter of 2010, which caused such a fuss last week, really did paint too bleak a picture of how the economy performed. It was based on only 50 per cent of the returns that will eventually count towards the data used by the ONS, and was particularly biased towards sectors of the economy most vulnerable to the effects of the terrible weather.