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The Economy.
Not all growth is equal: anyone who judges the economy by GDP alone is likely to be off the mark. Figures are revised more often than you think.
Recession or stagnation?
Some people look only at gross domestic product (GDP) and declare the economy to be growing, stagnating or in recession. That can be misleading. By definition, a technical recession means the economy shrinks for two quarters in a row (seasonally adjusted, compared with the previous quarter). But that falls short. You have to check whether the decline was short-lived or is lasting, whether special factors caused it, and how large it really is. This is where the definition gets fuzzy: does a rate of ±0.2% mean growth, contraction or rather stagnation? And even when the economy is growing, the question remains why: special factors or sustainable growth? Above, below or in line with potential growth? Because not all growth is equal: a developing economy has a much higher potential growth rate than an advanced one.
Why figures change after publication
On top of that, there is a growing problem in Europe, especially in Germany: since the early 2010s, and even more since the 2020s, published GDP data have been revised more and more, sometimes up to two years later. The reason: financial markets want as many new figures as possible, so GDP figures are published earlier and earlier. China was a pioneer here, and other countries followed. But the calculation can only include the data available at that point, and that is far from enough. As soon as more data are available, the figures are revised. So a stagnation can become a recession and then a stagnation again, within two years and for one and the same period. Growth forecasts build mathematically on the figures of previous years, so they are affected too.
What can be done
So what can be done? It helps to look at a wide range of economic indicators, from leading indicators to the “hard” figures from manufacturing. It is worth remembering that manufacturing in Germany and Austria is an important growth driver but by no means reflects the whole economy: it accounts for less than 20% of economic output (gross value added) in both countries. Services account for around 70%. Monthly activity data are now available for some service sectors, but they are hardly discussed in the media. Leading indicators (e.g. the ifo Business Climate or the Austrian WIFO index) are better known, but they measure sentiment rather than actual activity. Government services, which in Germany are about as large as manufacturing, are largely uncovered: at best, you can infer spending from federal and state budgets.
In short: the news is full of manufacturing and construction, which reflect only part of the economy, while services remain a blind spot. This distorts how people see the economy. They then distrust the revised data, which cover the economy as a whole. More scepticism about the data and a flood of negative news dampen sentiment and can become a self-fulfilling prophecy. It should not come to that.
Quick questions
How can I tell whether the economy is in recession?
By the common definition, a technical recession means the economy shrinks for two quarters in a row. But that falls short. What matters is whether special factors caused the negative quarterly growth rate (adjusted for prices and seasonal effects), how negative it is and whether the decline lasts. That is often hard to judge precisely in real time. In the US, a committee at the NBER only determines after the fact when a recession began and ended.
What is the difference between stagnation and recession?
This should be an easy question. Stagnation means the economy is not growing; recession means output is falling. In practice it is less clear-cut: growth of exactly 0% is rare, while rates hovering around 0% are common. Personally, I would call year-on-year growth of plus or minus 0.2% stagnation, and only speak of “slight decline” or “slight growth” beyond that. But that is, “unfortunately”, a matter of opinion.
Does a rising GDP mean the economy is growing healthily?
Not necessarily. It depends on why and how strongly the economy is growing. Economic growth can be driven by special factors. For example, growth after a recession is often particularly high (the classic “rebound effect”). Alternatively, higher government spending financed by additional borrowing can boost economic activity. Depending on what the spending is used for, this can be more or less sustainable. Growth below potential is not “healthy” either, and that potential depends on how developed a country is: a developing economy has a much higher growth potential than an advanced one.
Why are GDP data revised so heavily?
Financial markets want new figures as early as possible, so GDP data are published earlier and earlier. Only the data available at that point go into the calculation, and the complete data only arrive much later. That leads to substantial revisions, mostly in summer with the comprehensive benchmark revision, which can change the growth rate by several tenths of a percentage point. So within two years a stagnation can become a recession and then a stagnation again, for one and the same year.
How reliable are growth forecasts?
Only to a limited extent. Growth forecasts are built mathematically on the figures of previous years. If these are revised retrospectively, the forecast changes too, even with the same assumptions about the future. New information plays a part too: an unforeseen event such as the outbreak of a war or an oil price shock, or households and businesses that react to a stimulus differently than expected. Forecasts are updated accordingly.
Which economic indicators should I look at?
A wide range: from leading indicators such as the ifo Business Climate to the “hard” figures from manufacturing, construction, retail and private consumption. It is worth bearing in mind that manufacturing provides most of the economic data in Germany and Austria but accounts for less than 20% of economic output (gross value added). Services account for around 70%. Monthly activity data are now available for some service sectors, but they are hardly discussed in the media. As a result, economic news covers only parts of the economy, and the picture of the economy can look distorted.
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