The growing divorce between GDP and the 'real' economy

It is revealing what happens to the GDP figures when the portion of debt used to fund immediate consumption is deducted from the GDP accounts. If this is done 2015 Global GDP should be reduced from $114 trillion to $102 trillion, and Morgan estimates trend growth over the period would be reduced from about 3-4% in conventional estimates to about $1.2% per annum.

Why have we seen an explosion in debt to GDP? There could be several factors at play, but the most important it seems to me, is related to the increasing cost of oil. As biophysical economists argue, economic growth crucially depends on additional inputs of energy. But from 2005 to 2014, following the peak in conventional oil, the global economy had to withstand very high oil prices. Across this period, consumers and investors took on ever greater levels of debt in order to maintain spending in the face of rising costs induced by the higher oil price. Of course, the high oil price incentivised additional oil supply, and we are consequently now experiencing an oil supply glut and relatively 'low' prices (though still double the adjusted for inflation price of oil in the 1990s). But the debt hang-over remains. And, while the low oil price relieves consumers, the debt problem is being transferred to oil producers, who are now rapidly accumulating debt, as they struggle to remain profitable at today's low oil price, especially given their increasing extraction costs of unconventional sources.

Implications:

If we consider these three trends together – financialisation, growing compensatory & defensive costs, and the increasing dependence on debt – we can see that GDP figures are a very unreliable indicator of the real state of the economy. These trends help explain why people today feel less prosperous, irrespective of rising GDP. But the reality is beginning to be revealed in the hard data. In Britain, Morgan points out that the cost of basic goods such as food & housing has risen faster than real wages. When one factors in population growth, he estimates that in terms of discretionary income (i.e. real wages, minus costs of essentials) Britain reached peak prosperity in 2003 and since then most people have become poorer. The trend is similar across the OECD. One study found that since 2005, real wage growth for the bottom 70% of households had stagnated or fallen, whereas before that time they had enjoyed at least some growth.

But none of this should be taken to mean the sensible path lies in, somehow, cranking up (real) growth and expanding the economy, as most policy makers and indeed ordinary people seem to want. A hard reality must eventually be faced. Even if we put aside the fact that GDP figures inflate the true size and "health" of the economy, still, in global terms the average western citizen has a material footprint that would be impossible to extend to all 9 billion people expected to inhabit the earth by 2050. The trends above should rather shake us out of our slumber, and waken us up to the fact that, whatever the GDP figures tell us, we face ecological, social and energy limits to growth. We need to take our collective eyes off the GDP, and develop alternative indicators of progress but, more importantly, new ways of living involving much lighter footprints but which still enable a good quality of life for all.