Value Column von Hans Peter Schupp

25 MARCH 2024

We are stagnating. Maybe it’s better that way!

In Germany, the state of the economy is being closely monitored. How much is it growing? How much pressure is it under? According to the German government, it is set to grow by 0.1 percent this year. Or will it continue to decline? Everything is measured in terms of gross domestic product. But is that the right parameter to look at?

War as a driver of gross domestic product

It seems paradoxical: despite the war in Ukraine, Russia’s GDP growth in 2023 exceeded that of almost all G7 countries. And this despite the fact that sanctions and lack of access to the majority of global markets are hampering economic activity.

This raises the question whether there is growth despite or because of the war? Also, if war, environmental disasters etc.  – indisputably negative events lasting on an economy – are drivers of GDP, it simply raises the question whether the GDP is a meaningful parameter of the state of the economy.

Evaluation and consequences

But back to the origins of national accounts: economics only really became involved in this field after the Great Depression in the 1930s. Attempts were made to calculate the negative impact of the consequences of this crisis. Later, US President Roosevelt wanted to prove the success of his „New Deal“ economic policy.

To do this, they used what is now known as the distribution calculation and looked at the national income, the combined income of the people. In short, what’s left in people’s pockets: wages, property income and corporate income?

Unfortunately, this did not develop as desired after 1941, when the USA entered the war. The money was needed for the war and was therefore no longer available to the population. So a new indicator was needed to suggest prosperity, even though the population was worse off.

Change in the methodology for measuring prosperity

Even then, it was known that the performance of an economy could be determined in three ways: Generation, distribution and utilization. So the methodology was simply changed from wealth distribution to wealth generation. An approach that still applies today.

From then on, the focus was no longer on income, but on production, with the comfortable effect that production figures did not look so bad during the war years, as war equipment, weapons and ammunition were needed and produced. Just like in Russia today. However, this also perverted the original idea of measuring the prosperity of an economy.

Catastrophes as a GDP catalyst?

Do you care for an example? A pile-up on the highway is certainly not an enjoyable event. But the expenditure for repairs or the purchase of a new car and the use of recovery vehicles increase the gross domestic product. However, if, for example, reconstruction after an earthquake increases GDP and the increase in GDP is the key indicator by which we judge economies, shouldn’t we actually then we wish for such negative events? Certainly not. Hence, we must at least question whether economic growth should be the decisive benchmark for assessing an economy and the main objective of government economic policy.

The focus should rather be on corporate profits or the level of unemployment and wages. This is also what we use as a guide when putting together the portfolio of our Contrarian Value Euroland Fund, but not GDP-level. Finally, a nice example of the bizarre nature of the calculations: Why is my working time not included in the GDP when I boil an egg? If I order it in a restaurant, the preparation is included in GDP.

Translation for convenience only!

About the author: Hans Peter Schupp is a managing partner of Fidecum AG und the portfolio manager of the Contrarian Value Euroland Fund.