Growth: is it a good indicator of a country’s economic situation?

We talk about it every day, growth, or rather recession lately. According to the politicians, a good president is a president who will have mandated during a good phase of growth. By hammering it, one would end up thinking that the balance of a country resides only on that point.

Some explanations

Before going into details, we must start by situating things. That is, what is growth? Growth is the relative change in real GDP from one year to the next. This leads us to ask ourselves, what is real GDP? This is the amount of wealth produced by a country’s economy for a year at a constant price (a reference year is used to set the price). In other words, growth is the additional creation of wealth from one year to the next. So when we say “growth of 1%”, it means that this year, we will have produced 1% more than last year.

In addition to these generalities, the nominal GDP is only the quantities produced multiplied by the price of these. Sounds pretty light as an economic indicator, right? It does not take into account anything other than quantity. The best in this list are not necessarily the best, China, for example, the second world power. Yet per capita, it is the 93rd just ahead of Bosnia and Herzegovina according to the IMF. Despite strong growth for more than a decade, the share of wages in China’s GDP is declining. This does not necessarily mean that they fall, but that they increase proportionally less quickly than the rest. As GDP is a rather vague datum, so is growth. It’s just a speed, comparing the growth of China to France has no interest. We are amazed to see such figures in emerging countries when we find it difficult to find 2%, but these magnitudes are necessary to view the observed levels of inflation.

So, growth is a very generic term, widely used by politicians but ultimately not very much in itself. Because we do not know the other parameters that are for example inflation. Comparing levels of growth is useless in different economic structures, we can compare France and Germany, but it is inept to remain wide-eyed before the double-digit growth of emerging countries.

The decay model

It is also very popular to be against the current system. We are of course thinking of the alter-globalist movements advocating, on every occasion, the model of degrowth. Today, a phase of the recession (negative growth = decline in the production of wealth from one year to the next) is perceived as a particularly harmful period. And for good reason, according to Okun’s law, there is a negative relationship between the growth rate and the unemployment rate, that is to say, that the more the growth increases and the more the unemployment decreases. Which is rather a good thing? Conversely, during a recession, unemployment increases.

Another problem with the model is demographics. In fact, it is easy to conceive that in a country where there is less and less population, the creation of wealth decreases. But when the population of a country increases, it goes without saying that the creation of wealth must increase. Otherwise, per capita wealth will necessarily fall.

In conclusion, without looking very far, the model of economic decline seems rather unenforceable to the economy of the current countries. On the other hand, as a measure, growth or even GDP never really reflects the economic reality of a country. Many indicators have been developed in recent years, however, it seems that nothing can dethrone the indicator of GDP in the list of investors.