Will the recovery be able to withstand the weather?

Whatever the storms' effect on economic output, people will feel worse off. The message for politicians is that living standards matter more than GDP

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The Independent Online

How much are the floods really going to cost the country? It might seem a bit heartless to think about this in economic terms when millions have at best been inconvenienced, and some sadly have lost their lives. But it is a fascinating economic story, not just for what it tells us about the way in which shocks affect economic output, but also about the way wealth is generated and the way we feel about wealth generation.

Of course, we have to guess at the numbers because it is far too early to make a proper tally, and there is a distinction between the short-term and the longer-term impact. Mark Carney, governor of the Bank of England, made this point last week. "You get a hit to GDP [gross domestic product] as it's going on and then you get a recovery – you get that back later on with the repair," he said.

So first-quarter growth will turn out to be lower than it otherwise would, and it is just possible that we will get a negative number, though I think that unlikely given the strong underlying growth. That is because the area affected in the Thames Valley is an economic powerhouse. It looks pretty but that is what a successful modern economy looks like. Brain industries are different from brawn industries, and this bunch in the Thames Valley produce about 13 per cent of the country's GDP. That is one-and-a-half times the output of Scotland.

How dented is that output? One industry, construction, will be seriously hit and it is being knocked by the bad weather everywhere, not just in the flooded areas. But construction is only 7 per cent of GDP, so the reduction in overall output won't be dramatic. What would be dramatic is if the performance of the core industries of the Thames Valley were damaged, and to some extent they will be. These are predominantly service industries, though there is also a hi-tech manufacturing sector. The problem is that it has proved very hard to measure the output of a service industry. You can count how many cars come out of the Mini plant in Cowley, just outside Oxford, but how do you count the intellectual capital generated by the two universities there? You can get a figure from their turnover but that probably is not affected by flooding, even though flooding has led to disruption. More generally, if people work from home because they cannot get into the office, is their output reduced?

So it becomes a guess, and my guess would be that the areas most affected by floods will experience a reduction of between 5 and 10 per cent of output over the quarter. Construction, agriculture and distribution will see more; manufacturing and service industries other than distribution, a bit less.

Then, as we move through the second and third quarters of the year, there will be a blip up. Some activity is lost for ever. A hotel room in a cute Thames-side hotel that is unfilled is business that cannot be recovered. But reconstruction after a flood is building work that would not have taken place. Insofar as the authorities spend public money on flood relief, that, too, is money that would not have been spent, though perhaps it will be found from economies in some other area. Overall, in hard numbers, things pretty much even out.

The world is – fortunately, some would say – not just about hard economic numbers. Here the flood experience highlights a really important fissure in the debate about what is happening to the economy at the moment. The figures may say that there is little overall impact but, in human terms, there most certainly is. Money spent on mopping up after a flood is not the same as money spent on having a good time. GDP may be the same but we feel, and on any sensible assessment are, poorer.

There is a message here for the economy. GDP is rising strongly but wages and salaries, as officially measured, still lag behind inflation. That will probably change this year if inflation remains at or below 2 per cent, as wages respond to greater demand for labour. On a wider measure, including other income, living standards are probably already starting to increase. But however you slice it, real income for the majority of people in the country is still below its 2008 peak. We have become poorer.

So the floods, and the response, illustrate something broader. Employment and hours worked have been remarkably strong through the whole recovery phase. Published GDP has been weaker, though it is now picking up. But because people have had to work harder to get back to where they were, they don't feel any gratitude to the authorities for their role in the recovery. People may at last be getting richer, but that is despite what this government, and its predecessor, have done; not because of it.

There is a message here for British politicians as the recovery widens and deepens. It is that they need to focus on detail. That detail includes the policies of the Environment Agency, where there are obviously lessons to be learnt. But it is much broader. Forget about GDP. The question is: will this change in policy, whatever it proves to be, increase or reduce living standards in the longer term? If the latter, then expect voters to notice.