By John Newsome on 29th January 2010

Britain has, at least in a technical sense, finally emerged from recession. Most industrialised nations have been posting anaemic growth in Gross Domestic Product (GDP) but Albion has lagged persistently. The Chancellor believes we are on the cusp of recovery but then, in the summer of 2008, he opined that we would escape recession, the British economy was in better shape than many to weather the storm while readily pointing out that the consensus of independent economists expected the economy to continue growing.

Now, Meat Loaf was on the right track when he told us that two out of three ain't bad. However, what he didn't say but perhaps should have, was that none out of three ain't good. Anyhow, it is probably best not to put too much faith in Mr Darling's predictions. He hasn't exactly been challenging the memory of Nostradamus over the past couple of years.

Talking of GDP, it is a statistic we have always viewed with suspicion. Probably because it is a number that, depending upon the circumstances, can be absolutely meaningless. You could be forgiven for believing it is a measure of honest toil but alas, the truth is more crude. In simple terms, GDP is a measure of activity within an economy. If we computed the value of final goods and services within the UK, we would tot up consumer expenditure (C), government spending (G) and investment (I). This, together with the net position of imports/exports (N) = GDP. At the risk of reviving the horrors of schooldays' algebra, we could express the formula as GDP = C + G + I +/- N.

But, and here's the rub, the proportion of 'G' that is financed by net borrowing (as opposed to taxation) carries no corresponding deduction; ever more borrowing and spending flatters GDP to a greater extent. As such, the sweet spot for artificial GDP creation is to borrow excessively and get the printing presses rolling. Perhaps we could call this the 'G Spot'. Most men apparently have difficulty finding it but clearly Messrs Darling and Brown required minimal instruction.

So, whatever happens to official GDP figures, it would be wise to remember how they are put together. Which leads, appropriately, to what will happen when the stimulus packages stop? Will GDP stutter again as debt fuelled 'G' is withdrawn? Alternatively, will politicians and central bankers be forced to reverse faster (but more accurately) than Tiger Woods in order to avoid serious inflationary pressure? We've given our view on that before but the self-inflicted tragedies now affecting the UK and US economies have plenty of time to run yet. Of one thing we can be sure. Bad decisions usually result in tangled wreckage; just look at Tiger's Cadillac.

John Newsome can be contacted on:
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