What is GDP? Meaning, what does it stand for, real-world impact - as UK economy records unexpected growth

The UK economy defied expectations between April and June, with official figures showing it grew by 0.2%.

Coming on top of 0.1% growth in the first three months of 2023, the news means the country could avoid a recession this year. It also means it is on course to defy forecasts by international trade and economic progress body the Organisation for Economic Co-operation and Development (OECD), as well as the International Monetary Fund (IMF).

While the development makes it more likely Prime Minister Rishi Sunak could achieve his pledge to grow GDP in 2023, economists are warning the UK still faces choppy economic waters in the face of rising interest rates and high inflation. On Wednesday (9 August), the National Institute of Economic and Social Research (NIESR) warned there was a 60% chance of a recession before the end of 2024.

Given next year will almost certainly contain a general election, this forecast means Mr Sunak still looks set to face a fight for his government’s survival. It also raises the prospect that opposition parties will try to focus voter attention on the Conservative Party’s economic performance - something that has come in for particular criticism over the last 13 years due to austerity and Liz Truss’s tumultuous term in office last autumn.

So, with economic growth likely to be a key battleground at the ballot box, what is GDP - and what does it mean for you?

What does GDP stand for?

GDP stands for Gross Domestic Product. This term describes a way of measuring the size and health of the economy. This measurement is usually taken over a period of three months (a quarter) or a full year.

If the economy is in growth, it means GDP is increasing. If the economy is contracting, it means GDP is reducing in size. When two consecutive quarters of contraction are recorded, the country is officially in a recession.

The Office for National Statistics (ONS) works out GDP by collecting data from thousands of UK companies. It then calculates the total value of the goods and services they have produced, which is known as ‘output’ to produce a ‘first estimate’ of GDP around a month after the end of the quarter.

The ONS publishes second and then final estimates to this statistic over the ensuing weeks, adding wage and total national spend data into the mix. It means the initial output-based figure you see is not necessarily the exact size of the UK economy - but it is the most comprehensive calculation we currently have.

A simple way to think of GDP is that it’s like measuring the size of a balloon with a ruler. While you can see how much the balloon has inflated or contracted by measuring its length, this measurement is not giving you the full picture of the balloon as it exists in front of you (for example, you’re not measuring the volume of the air inside it or its circumference). You only get a fuller picture once these other data points have been added into the mix.

This balloon analogy can also capture one of several big problems with GDP as a metric. While it shows us value in pure monetary terms, it doesn’t cover other ‘valuable’ things in life, like wellbeing (for example, the joy a child gets when they are given the balloon).

Another criticism of the yardstick is that it doesn’t show us how evenly wealth is distributed around the UK. It can also be artificially inflated by war - a fact analysts currently believe we are seeing with Russia’s GDP statistics.

While the pariah state’s GDP has taken a knock since it invaded Ukraine - falling 2.1% over the course of 2022 - this figure is likely to have been inflated by its military output. It is having to produce more and more arms to fight the war in Ukraine. But what GDP does not show is how these arms have then fared on the battlefield (for example, Ukraine claims to have blown up more than 4,100 Russian tanks over the course of the conflict). So the measurement is not necessarily a sign of real-world success.

What does GDP mean for me?

Although GDP is by no means a perfect measurement, it gives us key information that can help us to make decisions and understand events in our everyday lives.

For example, if the economy is shrinking, it means unemployment may be about to increase as companies are likely to be reducing investment in or the size of their operations. So, your job is more likely to be under threat than if the economy was in good health. One knock on impact of this that was seen during the last major recession in 2008/09 was the boarding up of high streets as retail businesses either fell into administration or cut the number of stores they operated.

Conversely, if the economy is experiencing strong GDP growth, you have a better chance of seeing your spending power increase. The business you work for is more likely to be eyeing expansion, which raises the prospect of promotions and better conditions. A booming economy is also likely to mean the government can raise more in taxes. The uplift from this scenario is that it becomes politically easier to improve the geographical spread and quality of public services, like the NHS.

So, while GDP isn’t an exact science, it can show you the direction of travel for the economy and your own personal finances.