In the aftermath of Covid-19, finding accurate ways to measure and compare economic progress is as important as ever. Economists and policy-makers are increasingly looking to complement conventional indicators of GDP, unemployment and productivity with metrics based on wellbeing.
The economic, social and political turbulence of the past two years has tested the strength and coping mechanisms of countries around the world. Covid-19 has challenged the resilience of institutions, as well as the reach and mandate of democracies in crisis situations.
The pandemic has raised questions about how these shocks and the policies to tackle them affect not only the economy, but also our lives in general. For example, some narratives during the pandemic claimed a trade-off between health and lives on the one hand, and the strength of the economy on the other.
But adopting a broader approach to policy will enable us to consider the balance between two interacting systems – the social and the economic – which will involve some trade-offs but also some synergies.
Inflation, unemployment and growth
Conventionally, a number of key economic indicators are used to assess the health of an economy. Growth in real GDP is prominent among them, along with inflation, unemployment and the trade balance.
Although it can be tricky to compare the figures directly because of methodological differences, these metrics are particularly useful for international comparison of economic outcomes. The methodology employed for conventional economic indicators also supports macroeconomic forecasts for the future of the economy, which are needed for setting monetary and fiscal policy.
These traditional indicators of economic health show the shock of the pandemic to the economy in several key spheres. Here, we take a brief look at GDP, unemployment and productivity, before and during the pandemic.
Figure 1: Quarterly GDP growth by country/region
Figure 2: Real GDP growth including forecasts, by country/region
Source: OECD.Stat. Note: On 17 March, the OECD published estimates of the economic effects of the Russian invasion of Ukraine. A scenario based on a series of assumptions, including higher commodity prices, resulted in GDP being one percentage point lower in the OECD and globally, compared with previous forecasts (see House of Commons Library, GDP International, 2022).
Figures 1 and 2 show the effects of Covid-19 on GDP growth in all G7 economies. With differences in intensity, the direction of change experienced by these countries is consistent, with an all-round decline in real GDP growth.
The greatest shock appears to have come at the very beginning of the crisis, during the first and second quarters of 2020, when most countries were under strict lockdown measures.
All G7 economies subsequently recovered as GDP grew in the third and fourth quarters of the same year. Real GDP growth stabilised across G7 economies from the end of 2020 and continued throughout 2021. Figure 2 shows that across all these countries, real GDP growth is forecast to slow down during 2022 and into 2023.
In the fourth quarter of 2021, UK GDP grew by 1% compared with the previous quarter (2021Q3). The United States, Canada and Japan grew faster than the UK compared with the previous quarter, at 1.7%, 1.6% and 1.1%, respectively. France, Italy and the euro area grew at a slower rate at 0.7%, 0.6% and 0.3%, respectively. Germany faced a 0.3% decline in real GDP growth in 2021Q4.
In terms of forecasts, the UK’s GDP is predicted to grow by 4.8% in 2022 and 2.1% in 2023. This is the highest expected growth level in 2022, relative to other G7 countries, but the second lowest predicted growth rate in 2023.
Figure 3: Unemployment rate including forecasts, by country/region
The unemployment rate has been steady and relatively low in the UK, at around 4% since 2016. This has fallen from 6.2% in 2014 and reached a low of 3.8% in 2019. In comparison with the remaining G7 economies, only Japan (2.4% in 2019) and Germany (3.2% in 2019) have had consistently lower unemployment rates than the UK since 2016.
An unexpectedly high level of job quits was recorded in the United States at the end of 2021. This raised the questions of whether a ‘great resignation’ was taking place following the pandemic (and its effect of having people re-evaluate their lives) and whether the same might be occurring in the UK. The evidence of the latter is currently inconclusive (Wadsworth, 2022).
The United States is predicted to have lower rates of unemployment than the UK in 2022 (3.9% compared with 4.3%) and in 2023 (3.4% compared with 4.2%), with a falling trend. The unemployment rate soared in Canada (9.6%) and the United States (8.1%) with the outbreak of the pandemic in 2020, but it is predicted to fall to almost pre-pandemic levels in the United States (3.4%) and to just above this point in Canada (5.8%) by 2023.
The rates in Japan and continental European countries have been more stable with a declining trend, although it should be noted that the starting rates in France, Italy and the euro area remain significantly higher than other G7 economies, rising from around 1% in 2014 to predictions of around 8% in 2023.
Figure 4: Annual change in GDP per capita
Productivity, measured by GDP per hour worked and GDP per capita, is another telling statistic. The impact of the pandemic on productivity across all of the G7 countries is clear.
All economies experienced a decline in GDP per capita growth from the previous year, ranging from the biggest decline in the UK (-9.8%) to the smallest in the United States (-3.9%). Italy and France saw declines in growth of -8.6% and -8.1%, respectively.
The UK’s productivity decline adds to one of the biggest economic policy questions currently facing the country – that of the ‘productivity puzzle’ (Lucas, 2021). By 2021, G7 countries experienced positive productivity growth compared with the previous year.
These conventional indicators can be useful for drawing certain conclusions. But there is increasing recognition, especially over the last decade, that they do not tell the whole story. In fact, these indicators miss a substantial part of explaining how well the economy is doing.
There are two main related problems. First, these indicators are somewhat ‘narrow’ in the information that they cover, and they omit things that are of interest to assessments of quality of life. For example, the unemployment rate alone does not tell us about the quality of employment, or precariousness within employment.
Second, these indicators risk being seen as ends of policy-making in themselves, while they may be quite detached from our broader wellbeing. GDP, income and employment can all contribute to our wellbeing, but are not necessarily constitutive of it.
These two issues have contributed to a shift in emphasis in policy and academic circles towards a ‘wellbeing economy’, involving multidimensional measures of economic progress and quality of life. Within these spheres of economic study, the aim of policy-making is to achieve individual and social wellbeing.
One prominent approach involves the economics of happiness. This uses a broader and alternative range of indicators to measure and evaluate the progress of an economy. The field is expanding at great pace: the World Happiness Report notes that the term ‘happiness’ is appearing more in texts, and now more often so than GDP (Helliwell et al, 2022). This indicates a shift in values and economic narrative.
Although the domain of happiness economics offers alternative conceptual approaches for analysing and measuring wellbeing, the most integrated into policy design is the ‘subjective wellbeing’ approach. This includes several metrics but is generally based on positive psychology concepts and uses self-reported measures, such as life satisfaction.
Figure 5: Negative affect balance
Source: OECD.Stat, Gallup World Poll
For example, the negative affect statistic represents the share of respondents that report more negative than positive feelings or states compared with the previous day. Figure 5 shows a mixed picture of individual subjective wellbeing in certain countries.
The most extreme valuations are reported in Italy, while those of Japanese and American individuals are the most steady (although Japanese citizens report overall lower levels of negative affect compared with US citizens).
The UK also appears to present a relatively steady level of individual subjective wellbeing, in terms of changes in negative affect. The balance fell between 2016 and 2018, indicating a rise in subjective wellbeing, but the proportion of negative states has continued to rise since 2018. Canada has followed a somewhat similar trajectory to the UK, but since 2017, it has had higher numbers of respondents with a greater proportion of negative feelings and states.
Figure 6: Life satisfaction
What about life satisfaction? The comparable data (gathered on two occasions in recent years – in 2013 and 2018), at the European and international level, reveal a slight upward trend in personal assessments of life satisfaction over the five years in Canada, France, Germany, Italy and the UK. The overall level between countries is similar, with the UK faring second best in terms of life satisfaction in 2018 among the five countries.
The risk in this approach is that policy again becomes focused on a single metric, and one that does not vary substantially over time (Agarwala et al, forthcoming). Although national level policy is bound to need a relatively small number of indicators of success, or otherwise, effective policies for wellbeing will require a broader approach. The 2009 Sen-Stiglitz-Fitoussi Commission recommended a ‘dashboard’ involving some conventional economic indicators, and a broader set of metrics speaking to quality of life.
The interest in economic and individual wellbeing measurement has led to a range of approaches that attempt to bridge both objective and subjective accounts of wellbeing.
To this end, several dashboard indicators have been proposed, such as the OECD ‘How’s Life?’ index or the United Nations’ Sustainable Development Goals (SDGs). These dashboards recognise the importance of self-evaluated ‘happiness’ or life satisfaction, but maintain that this is just one element of overall wellbeing.
They also emphasise the need to complement subjective assessments of wellbeing with objective indicators. The danger inherent in dashboards is that they can proliferate indicators (the SDGs have 231 and provide no framework for evaluating trade-offs between them). Nevertheless, they can be helpful in understanding what contributes to individual wellbeing and quality of life.
Finally, official economic statistics are themselves expanding to cover a wider range of indicators of progress alongside GDP growth. The System of National Accounts, promulgated by the United Nations, has already adopted official methods for measuring natural capital and the use of ecosystem resources. It is currently undergoing a major revision that will see other previously ‘missing’ assets – such as health as part of human capital and some cultural assets – being defined and implemented over time.
The diverse country dynamics described above point to the benefit of a balanced overview of multiple important spheres for a context-specific analysis of economic wellbeing, particularly at a time when successive crises – the global financial crisis, the pandemic, Brexit (for the UK) and war in Ukraine – have led many people to question how we should assess economic progress or its absence.
Where can I find out more?
- World Happiness Report 2022.
- The latest international data releases can be found here: OECD Statistics.
- Latest European country data releases can be found here: Statistics | Eurostat (europa.eu).
Who are experts on this question?
- Paul Allin
- Eric Beinhocker
- Diane Coyle
- Jan-Emmanuel De Neve
- Mark Fabian
- John Helliwell
- Richard Layard
- Mary Morgan
- Joseph Stiglitz