The Property Playing Field Is Tilting Away From Investors

Continuing our series on our latest household survey results, we look more deeply at the attitude of property investors, who over the past few years have been driving the market. We already showed they are now less likely to transact, but now we can look at why this is the case.

Looking at investors (and portfolio investors) as a group, we see the prime attraction is the tax effectiveness of the investment (negative gearing and capital gains tax) at 43% (which has been rising in recent times). But availability of low finance rates and appreciating capital values have both fallen this time around.  They are still driven by better returns than deposits (23%) but returns from stocks currently look better, so only 6% say returns from investment property are better than stocks! Only tax breaks are keeping the sector afloat.

We can also look at the barriers to investing. One third of property investors now report that they are unable to obtain funding for further property transactions, nearly double this time last year.

Then 32% say they have already bought, and are not in the market at the moment. Whilst concerns about more rate rises have dissipated a little, factors such as prices being too high, potential changes to regulation and RBA warnings all registered.

Turning to solo property investors (who own just one or two investment properties), 43% report the prime motivation is tax efficiency, 40% better returns than bank deposits and better returns than stocks (7%). But the accessibility of low finance rates and appreciating property prices have fallen away.

Those investing via SMSF also exhibit similar trends with tax efficiency at 43%, leverage at 16%, and better returns than deposits 14%. Once again, cheap finance and appreciating property values have diminished in significance.

We also see 23% of SMSF trustees get their investment advice from internet or social media sites, 21% use their own knowledge, while 13% look to a mortgage broker, 14% an accountant and 4% a financial planner. 15% will consult with a real estate agent and 9% with a property developer.

There is a fair spread of portfolio distribution into property. 13% have between 40-50% of SMSF investments in property, 29% 30-40% and 30% 20-30% of their portfolios.

Next time we will look at first time buyers and other owner occupied purchasers. Some are taking up the slack from investors, but is that sufficient to keep the market afloat?

The New Banking Code Is Simply The Minimum Customers Expect

Let’s be clear, the floating of the new banking code is not bad, but is really is still setting a low bar and contains elements which most customers would already expect to see. This is not some radical new plan to improve customer experience, rather more recognition of the gap between bank behaviour and customer expectation. And it does not HAVE to be implemented by the banks anyway.

There is much more work to do. For example, how about proactive suggestions to switch to lower rate loans and better rates on deposits?  What about the preservation of branch and ATM access? What about the full disclosure of all fees relating to potential loans?  And SME’s continue to get a raw deal thanks to lending policy and bank practice (despite the hype).

Then the biggie is mortgage lending policy, where banks current underwriting standards are set to protect the bank from potential loss, rather than customers from over-committing.

That said, this piece from the New Daily discusses the code and calls out some of the changes.

The year 2017 saw the big banks introduce a slew of measures, from scrapped ATM fees to new ethical codes, all intended to boost their battered reputation and fend off a royal commission.

In the end these measures were not enough, and in late November Prime Minister Malcolm Turnbull folded to political pressure and called a royal commission.

Nevertheless many of the banks’ voluntary measures will significantly improve consumer experience.

In particular, the new Banking Code of Practice, a list of consumer-centric reforms written by the banks themselves, will make a number of changes that consumers can use to their advantage.

Currently before the Australian Securities and Investment Commission for approval, the new Code is likely to include recommendations by the Australian Banking Association (ABA) that will significantly benefit individual consumers, as well as small businesses and guarantors.

The ABA said that included in the Code are key changes aimed at making banking more accessible and increase availability to consumers, alongside higher transparency and increased standards.

We’ve picked out some of the key changes that could benefit the average Aussie punter.

1. Online cancellation of credit cards

Currently credit cards can only be cancelled by a phone call or written request, but only after the balances has been paid or transferred. Direct debits that are not cancelled may reactivate a cancelled credit card. So knowing in advance what direct debits are applicable will prevent this happening.

Consolidating all credit cards into a debt consolidation loan will be simpler if the borrower can provide evidence of credit card cancellation, facilitated by online cancellation.

2. Notification of when payment defaults are reported to credit reporting bodies

With Comprehensive Credit Report becoming compulsory for the big four banks from 1 July 2018 there will be the obligation not only to share credit data with other credit providers, but also report positive credit behaviour.

Keeping track of defaults and exhibiting future positive credit behaviour will be advantageous to borrowers when applying for future loans, by increasing their credit worthiness.

3. Notification of introductory credit card interest free period expiry

Transferring the balance of a credit card to a low interest rate credit card can be a smart way to pay down credit card debt but only if this can be done within the interest free period. After the period expires the credit card interest rate can revert to a much higher rate, leaving the borrower in a similar position prior to transferring to a low interest rate card.

4. Proactively identifying customers who may be experiencing financial difficulty

Financial hardship assistance programs offered by banks will be improved as well as a new commitment for banks to proactively work with their customers in financial difficulty to help prevent a situation worsening.

5. Consumers can request a list of direct debits and recurring payments made on credit card and bank accounts

As mentioned previously a cancelled credit card can be reactivated by direct debits that have not been cancelled. As more and more payments are made by direct debits, customers are becoming further entrenched with their bank, and closing an account or transferring to another bank can become unfeasible if there is not an easier way of knowing direct debits and other payments.

6. Improved fee disclosure and waiving or refunding of some fees

The removal of fees to bank statements for customers who do not have access to electronic statements, and improved disclosure of fees will save consumers money and improve their ability to manage their finances.

Businesses will also benefit with more notice of changes to loans, and simplified loan contracts that are more easily understood.

Small Business and Family Enterprise Ombudsman Kate Carnell said she was concerned the code cannot be properly enforced.

“The committee will not be fully independent and banks won’t be obliged to accept its recommendations,” she said.

“The code stipulates only that banks will comply with ‘reasonable’ requests of the committee. This means effectively that banks will only act on recommendations if they feel like it. If they don’t think the committee is reasonable they have an escape clause.

“It’s like the umpire is appointed by the home team and they don’t have to accept the umpire’s decision.”

At the same time Ms Carnell welcomed the code’s “simplified language” and specific focus on small businesses.

Household Spending Remains Key to U.S. Economic Growth

From The St. Louis Fed On The Economy Blog.

Household-related spending is driving the economy like never before, according to a recent Housing Market Perspectives analysis.

Since the U.S. economy began to recover in 2009, close to 83 percent of total growth has been fueled by household spending, said William R. Emmons, lead economist with the St. Louis Fed’s Center for Household Financial Stability.

“Hence, the continuation of the current expansion may depend largely on the strength of U.S. households,” noted Emmons.

An Examination of the Current Expansion

In July, the U.S. economic expansion entered its ninth year, and it should soon become the third-longest growth period since WWII, Emmons said. He noted that it would become the longest post-WWII recovery if it persists through the second quarter of 2020.

However, the current expansion has been weak and ranks ninth among the 10 post-WWII business cycles, as shown in the figure below.1 “Only the previous cycle, ending in the second quarter of 2009, was weaker,” he said. “That cycle was dominated by the housing boom and bust and culminated in the Great Recession.”

business cycles

The Changing Composition of Economic Growth

Emmons noted that the composition of economic growth also has changed in recent decades and has generally shifted in favor of housing and consumer spending,2 as shown in the figure below.

GDP Growth

“Only during the brief 1958-61 cycle did residential investment—which includes both the construction of new housing units and the renovation of existing units—contribute proportionally more to the economy’s growth than it has during the current cycle,” Emmons said.

He noted that, perhaps surprisingly, homebuilding subtracted significantly from economic growth during the previous cycle even though it included the housing bubble. “The crash in residential investment was so severe between the fourth quarter of 2005 and the second quarter of 2009 that it erased all of housing investment’s previous growth contributions,” he said.

He noted that residential investment typically subtracts from growth during recessions. Thus, its ultimate contribution to the current cycle likely will be less than currently shown because the next recession will be included as part of the current cycle.

At the same time, he said, personal consumption expenditures (i.e., consumer spending) also have been very important in recent cycles.

Emmons noted that consumer spending has contributed close to 75 percent of overall economic growth during the current cycle. The share was higher in only two other cycles. “Not surprisingly, strong residential investment and strong consumer spending tend to coincide when households are doing well,” he said.

Notes and References

1 The current business cycle began in the third quarter of 2009 and has not yet ended. The provisional “end date” used is the second quarter of 2017, which was the most recent quarter ended at the time this analysis was done.

2 The other components of gross domestic product (GDP) are business investment, exports and imports of goods and services, and government consumption expenditures and gross investment.

Latest Survey Results Are In – The Great Property Rotation Is On

Digital Finance Analytics has completed the analysis of our latest household surveys, to December 2017. We see some significant shifts in sentiment, which we will discuss in more detail over the next few days. These results will inform our option of likely developments in 2018. But here is a summary.

  • First, obtaining finance for a mortgage is getting harder – this is especially the case for some property investors, as well as those seeking to buy for the first time; and those seeking to trade up. Clearly the tightening of lending standards is having a dampening effect. As a result, demand for mortgage finance looks set to ease as we go into 2018 and mortgage growth rates therefore will slide below 6%.
  • Next, overall expectations of future price gains have moderated significantly, and property investors are now less expectant of future capital growth in particular. This is significant, as the main driver for investors now is simply access to tax breaks. As a result, we expect home prices to drift lower as demand weakens.
  • Mortgage rates have moved deferentially for different segments, with first time buyers and low LVR refinance households getting good deals, while investors are paying significantly more. This is causing the market to rotate.
  • Net rental returns are narrowing, so more investors are underwater, pre-tax. So the question becomes, at what point will they decide to exit the market?

Here are some summary slides. We see a falling expectation of home price rises in the next 12 months, across all the DFA household segments. Property Investors are clearly re-calibrating their views, which could have a profound impact on the market. Those seeking to Trade Up are most positive of future capital growth.

First time buyers remain the most committed to saving for a deposit, while those who desire to buy, but cannot are saving less.

We see a significant slide in the proportion of property investors and portfolio investors who are looking to borrow more. We will explore the reasons for this change in a later post.

As a result, the proportion of investors expecting to transact in the next year has fallen. In fact, only Down Traders are slightly more likely to purchase than last time.

Finally, for today, we see minor changes in the intention to use a mortgage broker.

We continue to see a pattern where those seeking to refinance, and first time buyers are most likely to turn to a broker. Some other segments are less likely to use the channel to obtain a loan.

Next time we will look in more detail at the segment specific data. But we can certainly say there is strong evidence now that the property market is rotating, away from investors, and towards owner occupied borrowers.  There will be consequences for the market.

 

 

 

ASIC Highlights Sell-Side Research Conflicts

Sell-side” research is general financial advice prepared and distributed by an AFS licensee to investors to help them make decisions about financial products. ASIC says  such firms must manage the conflicting interests of their issuing and investing clients when preparing investor education research. They have given the industry six months (to 1 July 2018) to make sure their compliance measures conform to the ASIC’s expectations as expressed in the released regulatory guidance.

ASIC has released regulatory guidance on managing conflicts of interest and handling inside information by Australian financial services (AFS) licensees that provide sell-side research.

Research helps investors to make investment decisions. The quality of research can affect the advice received and investment decisions. A licensee who provides research must comply with a number of regulatory obligations. They must:

  • control and manage inside information
  • manage conflicts during the capital raising process, including avoiding,
  • controlling and disclosing these conflictsmanage research teams, including budgeting, research analyst remuneration and coverage decisions

Regulatory Guide 264 Sell-side research (RG 264) looks at the key stages of a capital raising transaction and provides specific guidelines on how an AFS licensee should appropriately manage conflicts of interest during each of these stages , including the preparation and production of investor education reports. RG 264 also provides general guidance for AFS licensees on the identification and handling of inside information by research analysts, and about the structure and funding of sell-side research teams.

The guidance addresses uneven market practice that has developed since the publication of Regulatory Guide 79 Research report providers: Improving the quality of investment research (RG 79) in 2004. It also responds to industry requests for more detailed guidance on sell-side research and supplements guidance in RG 79.

RG 264 takes into account feedback from stakeholders following public consultation earlier this year, see Report 560 Response to Submissions on CP 290 Sell-side research (REP 560).

Commissioner Cathie Armour said, ‘The timely flow of information and objective research analysis is vital to fair and efficient markets. Investors consider sell-side research when making investment decisions. It is critical that sell-side research represents the genuine, professional opinion of analysts.

‘Wholesale investors want early information and analyst insights on companies undertaking capital raising. Firms that manage this process must manage the conflicting interests of their issuing and investing clients when preparing investor education research. It is important thatthis deal-related research does not undermine the prospectus disclosure or continuous disclosure requirements. RG 264 will help industry strike the right balance between these competing considerations’.

While RG 264 does not extend the regulatory framework in RG 79, ASIC will give industry six months to 1 July 2018 to make sure their compliance measures conform to the expectations set out in the this guide.

Download

Background

In June 2017, ASIC released Consultation Paper 290 Sell-side research (CP 290) which proposed to provide further guidance on managing conflicts of interest and inside information involving sell-side research.

The consultation followed the release of Report 486 Sell-side research and corporate advisory: Confidential information and conflicts (REP 486) in August 2016. REP 486 set out observations from our review of how material non-public information and conflicts of interest are handled in the context of sell-side research and corporate advisory activities.

ASIC’s review showed that AFS licensees involved in providing research would benefit from detailed guidance on managing material, non-public information and conflicts of interest.

Sell-side research is general financial advice prepared and distributed by an AFS licensee to investors to help them make decisions about financial products.

Latitude Insurance Refunds $1.1 Million From CCI Mis-selling

Hundreds of Latitude Insurance customers were mis-sold consumer credit insurance (CCI) with personal loans says ASIC and will be refunded to a total of $1.1 million.

Hallmark General Insurance Company Ltd (trading as Latitude Insurance) will provide refunds  of approximately $1.1 million to 905 customers after it mis-sold consumer credit insurance (CCI) with Latitude personal loans and incorrectly denied claims on CCI policies sold with Latitude and other credit cards.

CCI is a type of add-on insurance that provides some cover to meet the repayments under a consumer’s loan contract if they die, suffer a traumatic illness (such as cancer), or become disabled or unemployed.

Latitude Insurance identified and reported to ASIC that between October 2011 and June 2014, it sold involuntary unemployment insurance to personal loan customers who were ineligible to claim because they did not work the required minimum 20 hours per week.

It also identified that between May 2014 and February 2017, its new partly automated claims assessment process had incorrectly denied claims to credit card CCI customers, because it failed to properly apply the exclusion definition of ‘casual employment.’

In response, Latitude Insurance will:

  • refund premiums and interest to personal loan involuntary unemployment insurance customers who were ineligible to claim. Customers also have the option to retain their policy and will not be subject to the minimum working hours condition for past or future claims.
  • pay claim amounts and interest to credit card CCI customers that had incorrectly denied claims.

Acting ASIC Chair Peter Kell said customers should never be sold insurance they won’t be able  to claim on and that claims processes must be robust.

‘Customers should always be confident that when they come to claim on their insurance, their claim will be properly assessed.’

Latitude Insurance will be contacting eligible customers.

Westpac Tightens Serviceability Requirements Again

From Australian Broker.

Consumers who use digital credit platforms like AfterPay and ZipPay will now have to disclose what they owe on these transactions if they apply for a home loan through Westpac.

Westpac announced in a broker note on 11 December that it would require borrowers to disclose these short-term buy-now, pay-later loans so the bank could better assess borrowers’ loan serviceability.

AfterPay and ZipPay allow customers to make and immediately receive goods and services purchased at a retail store or online without having to pay for it upfront. The digital credit companies pay on the customer’s behalf. The customer then has to make repayments, usually in installments over a short period of time with fees and charges incurred if they fail to do so.

“In the scenario above, the customer has created a liability which must be captured in the loan application along with the monthly repayment,” the Westpac note said.

“Where evidence is held to confirm the liability will be cleared in full before settlement or drawdown, a $1 repayment is acceptable to be entered against the liability.”

The bank said it expects detailed comments to be included in the application with evidence confirming the amount owing and the required repayments.

Banks are starting to zero in on borrowers’ spending habits and expenses, going above and beyond just looking into their credit and debit card charges.

In September, ANZ and CBA added extra checks to their application processes. ANZ’s updated customer questionnaire prompts brokers to ask prospective borrowers about their Netflix and Spotify subscriptions and whether they’re planning to start a family. CBA introduced a simulator to show interest-only borrowers how their repayments would change and affect their lifestyle. Customers wanting to proceed have to fill in an acknowledgement form.

A Year In A Week – The Property Imperative 23 Dec 2017

In This Week’s Edition of the Property Imperative we look back over 2017, the year in which the property market turned, focus on the risks to households increased, and banks came under the spotlight as never before.

Welcome the penultimate edition of our weekly property and finance digest for 2017.

We start with the latest Government budget statement, which came out this week.  There was a modest improvement in the fiscal outlook, largely reflecting a boost in tax collections, including from higher corporate profits in the mining sector. But there was also a consumer shaped hole, driven by low wages, lower consumption and lower levels of consumer confidence. Yet, in the outlook, wages are predicted to rise back to 3%, and this supporting above trend GDP growth. This all seems over optimistic to me.

In any case, according to the IMF, GDP is a poor measure of economic progress, with its origins rooted firmly in production and manufacturing. In fact, GDP misrepresents productivity and they say companies that are making huge profits from mining big data have a responsibility to share their data with governments.

The mortgage industry has seen growth in lending at around 6% though the year, initially led by investors piling into the market, but then following the belated regulatory intervention to slow higher risk interest only lending, momentum has switched to first time buyers, at a time when some foreign buyers are less able to access the market. A third of customers with interest-only mortgages may not properly understand the type of loan they have taken out, which could put many in “substantial” stress when the time comes to pay their debt, UBS analysts have warned. We have also seen a change in mix, as smaller lenders and non-banks (who are not under the same regulatory pressure) have increased their share. AFG’s latest Competition index which came out yesterday, showed that Australia’s major lenders have taken a hit with their market share now down to a post-GFC low of 62.57% of the mortgage market.

Household finances have been under pressure this year, with income growth, one third the rate of mortgage growth, so the various debt ratios are off the dial – as a nation we have more indebted households than almost anywhere else.  This is a long term issue, created by a combination of Government Policy, RBA interest rate settings, the financialisation of property, and the rabid growth of property investors – who hold 35% of mortgages (twice the proportion of the UK). The combination of rising costs of living, and out of cycle rate rises, have put pressure on many households as never before – and we have tracked the rise of mortgage stress through the year to an all-time high.

The latest MLC Wealth Sentiment Survey contained further evidence of the pressure on households and their finances. Being able to save has been a challenge for a number of Australians – almost 1 in 5 of us have been unable to save any of our income in recent years, and for more than 1 in 4 of us only 1-5%. Expectations for future income growth are very conservative – nearly 1 in 3 Australians expect no change in income over the next few years and 15% expect it to fall. Our savings expectations for the future are also very conservative – with more than 1 in 5 Australians believing their savings will fall. The “great Australian dream” of home ownership is still a reality for many, but for some it’s just a dream – fewer than 1 in 10 Australians said they didn’t want to own their own home, but 1 in 4 said home ownership was something they aspired to but did not think it would happen.

Of course the RBA continues on one hand to warm of risks to households, as in the minutes published this week, yet also persists with its line that households can cope, with the massive debt burden, as its skewed towards more wealthy groups. They keep referring to the HILDA survey, which is 3 years old now, as a basis for this assertion. They should take note of a Bank of England Working paper which looked at UK mortgage data in detail, and concluded the surveys tend to understand the true mortgage risks in the market – partly because of the methodology used.  They concluded “These results should make policy makers less sanguine about the developments in the UK mortgage market in recent years, which are traditionally analysed using these surveys”.

The latest report from S&P Global Ratings covering securised mortgage pools in Australia to end Oct 2017, showed 30-day delinquency fell to 1.04% in October from 1.08% in September. They attribute part of the decline to a rise in outstanding loan balances during the month, and many older loans in the portfolios (which may not be representative of all mortgages, thanks to the selection criteria for securitised pools). But 90+ defaults remain elevated – at a time when interest rates are rock bottom.

Banks are under the gun, as Government have turned up the pressure this year. There are a range of inquiries in train, from the wide-ranging Banking Royal Commission (which the Government long resisted, but then capitulated), and a notice requiring banks, insurance companies and superannuation funds to detail all cases of misconduct from 2008 onwards has also been issued. The scope includes mortgage brokers and financial advisers. Also the ACCC is looking at mortgage pricing, The Productivity Commission is looking at vertical integration, and we have the BEAR regime which is looking at Banking Executive Behaviour.  This week we also got sight of the Enhanced Financial Services Product Design Obligations, and of course the major banks copped the bank tax. There are also a number of cases before the Courts. This week, NAB said it had refunded $1.7 million for overcharging interest on home loans and CommInsure paid $300,000 following ASIC concerns over misleading life insurance advertising

This tightening across the board is a reaction to earlier period of market deregulation, privatisation and sector growth. But at its heart, the issue is a cultural one, where banks are primary focussing on shareholder returns (as a company that is their job), but at the expense of their customers.  Even now, the decks are stacked against customers, and the newly revised banking code of conduct won’t do much.  We think the Open Banking Initiative will eventually help to lift competition, and force prices lower. But, after many years of easy money, banks are having to work a lot harder, and with much more lead in the saddle bag. Meantime, it is costing Australia INC. dear.

More significantly, the revised Basel rules, though watered down, still tilts the playing field towards mortgage lending, and makes productive lending to business less attractive.  Also there is more to do on bank stress testing according to the Basel Committee. The regulation framework is in our view faulty.

One question worth considering, as the USA and other Central Banks lift their base cash rates, is whether there is really a “lower neutral rate” now. Some, in a BIS working paper have argued that Central Banker’s monetary policy have driven real interest rates lower, rather than demographics. But another working paper, this time from the Bank of England, comes down on the other side of the argument.  The paper “Demographic trends and the real interest rate” says two-thirds of the fall in rates is attributable to demographic changes (in which case Central Bankers are responding, not leading rates lower). In fact, pressure towards even lower rates will continue to increase. This is a fundamentally important question to answer. We suspect the role of Central Bankers in driving rates is less significant than many suspect, and structural changes are afoot.

Rates in Australia have stayed low this year, at 1.5%, despite the RBA saying this is below the neutral setting, and we expect the bank to move later in 2018, upwards. The rate of rise is now expected to be lower than a year ago, but the international pressure will be up. In addition, the US tax reforms will likely switch more investment to the US, and so banks, who rely on international funding, will likely have to pay more. So we still expect real rates to go higher ahead, creating more pressure on households. Also, of course as rates rise, the costs of Governments running deficits rises, something which will be a drag on the budget later.

Home prices continued to rise through 2017 in the eastern states, while in NT and WA they fell. Recent corrections in Sydney may be an indication of what is ahead in the Melbourne market too. Demand remains strong, but lending standards have been tightened, and investors are getting more concerned about future capital appreciation. This year building approvals were still pretty strong, in line with firm population growth. As an aside, an OECD report this week said that Australian property may well be a target for money laundering, and more needs to be done to address this issue.  Auction volumes continue to slide, and we have seen a significant fall in recent weeks.

So, this year we have seen changes in the financial services landscape, the property market is on the turn, and household’s debt levels are rising, creating financial stress for many. As a result, we expect many to spend less this Christmas.

Next time we will discuss the likely trajectory through 2018, but we wanted to wish all our followers a peaceful and restful holiday season. We have really appreciated all the interest in our work – through the year we have more than doubled our readership, thanks to you.

Many thanks for watching. Check back next week for our views on what 2018 may bring.

Bitcoin Takes A Dive

Further evidence of the volatility of Bitcoin, the virtual distributed ledger currency, which operates without supervision, or central bank support.

Bitcoin touched an all-time high of $19,896 on December 17 having passed the $15,000 mark on December 7. It’s slumped over the past few days, to a low of $12,504 before recovering somewhat. It is still up over 1,100 percent this year. Bitcoin is not alone, the other 20 or so crypto-currencies also retraced.

Many say serious numbers of unsophisticated investors have been piling in (even buying Bitcoins on their credit cards!).  This volatility is likely to continue, and prospective investors need to be aware they may loose their investment, they may not – there can be no certainties.

Opinion is split as to whether this is simply a speculative bubble similar to “Tulip Mania” or whether there is more here about a potential digital replacement for the US$. We suspect the former is closer to the truth.

The classic bubble shape of the South Sea Bubble is often cited and is an interesting case study.

South Sea Bubble

GDP – Not Fit For Purpose In The Digital Era

From The IMF Blog.

Gross domestic product, or GDP, has been used to measure growth since the Second World War when economies were all about mass production and manufacturing. In this podcast, economist Diane Coyle, says GDP is less well suited to measure progress in today’s digital economy.

“I think the issue for GDP comes if the pace or scope of innovation is changing as much as it seems to be at the moment,” says Coyle. “So, that gap between what we’re measuring and the welfare effect seems quite large.”

Coyle, Professor of Economics at the University of Manchester in the United Kingdom, says while economists argue GDP was never meant to measure welfare, nearly everyone assumes it does just that.

“GDP is shorthand for welfare,” says Coyle. “So, if it’s becoming a less good indicator, that really matters.”

Another aspect of the economy that Coyle says GDP misrepresents is productivity. With all the technological advances in recent years one would expect that economies have become more productive. But GDP suggests the opposite is true. Coyle refers to this phenomenon as the productivity puzzle and says the mismeasurement of digital activities within the economy has a lot to do with it.

Coyle also emphasizes the role of official statistics in measuring productivity and growth. She says companies that are making huge profits from mining big data have a responsibility to share their data with governments. Because the purpose of official statistics is to enable governments to better run their countries.

“It’s part of the social contract,” says Coyle. “If you are a successful company taking advantage of the legal system, the infrastructure and public facilities in a country, then it’s just part of the deal that you cooperate with the statistical agencies.”

You can listen to the podcast HERE

You can also watch the webcast of Diane Coyle speaking at the IMF Statistical Forum on Measuring the Digital Economy.

Diane Coyle is author of GDP A Brief but Affectionate History