From Monday's City AM:
THE HOUSING boom and other changes in asset prices could have led statisticians to overestimate the contribution of financial services to GDP, according to the Bank of England’s quarterly bulletin, out today.
As the sector grew twice as fast as the economy as a whole, its position as a driver of growth is not in question*, but the exact pace is debatable.
A difficulty with rising house prices comes when indirectly measuring banks’ output. One main measure, financial intermediation services indirectly measured (FISIM), is based on deposits and loans. It assumes that the value added is represented by the margin banks make.
This is never going to give perfect results**, and the report suggests it may have become less accurate when house prices boomed. There was no increase in the number of loans approved in the boom years, but the size of those loans increased. “That suggests little change in output, but the stock of mortgage lending … rose by almost 60 per cent” – which could artificially inflate the value added by the sector.
The report believes up to 0.1 per cent of GDP each year may have been wrongly attributed to the sector, which could knock total GDP slightly.
* Oh yes it is, very much so.
** From here: [The banks] form a powerful lobby since financial services contribute about 10 percent to the UK economy. Banks DO NOT and CAN NOT possibly contribute that much. For sure, they run a very efficient and convenient payment system which might well add one or two per cent to GDP, but the bulk of the ten per cent which goes through their sticky fingers is merely rents (which they call 'interest') they collect from the real economy and then pay out again (back to savers or to shareholders or to the bankers as bonuses). At the margin, banking reduces the size of the economy, i.e. what some people call a 'financial crisis'.
Friday, 23 September 2011
Well duh!
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5 comments:
Don't forget that financial services based in the City also charge foreigners for financial services provided.
I'm sure you are right that the contribution of financial services to the economy is exaggerated, but it is greater than just the payment system provided by the banks.
AC, fair point. If bankers were like English pirates of very old and robbed foreigners but left English shipping alone, then fair enough.
"its position as a driver of growth is not in question"
In a way this is correct, but only if you use GDP as the measure of growth. Spending money borrowing against inflated so-called "value" boosts GDP in the short term (only to act as a drag on GDP later because you spend part of your income for the next five years on interest rather than beer).
As always, the problem with all "official" pronouncements about growth is the use of GDP as the measure.
TFB, that's a slightly different topic. A large part of GDP is made-up figures anyway, it wouldn't be too difficult to minus off credit growth from GDP each year to arrive at an underlying GDP real figure.
>it wouldn't be too difficult to minus off credit growth from GDP each year to arrive at an underlying GDP real figure.
I and LOLA have argued for this for a long time.
I think another blogger ran the numbers and correctly found out, we're slowly getting poorer (which I tend to agree with (takes longer to earn enough to afford to employ someone)).
AC1 Still trying to get his blogger account sorted out.
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