GDP and recessions: what the headlines mean

GDP (Gross Domestic Product) is the total value of everything an economy produces in a period: goods, services, from cars and olive oil to haircuts and software. It is the most widely used single measure of how big an economy is and whether it is growing or shrinking.

Three ways to count the same thing

Statisticians can measure GDP in three ways, which should give the same answer:

• Output: add up the value each business and public service adds.
• Spending: add up what households, companies, government and foreigners (exports minus imports) spend on what is produced.
• Income: add up the wages, profits and taxes earned from producing it.

The spending view is the one most often in the news: when households spend less, or exports fall, GDP growth slows.

Real versus nominal

Nominal GDP is measured in today’s euros. If prices rise 3% and the economy produces exactly the same as last year, nominal GDP still rises 3%. That is not real growth.

Real GDP strips out price changes (inflation) so it shows whether the economy actually produced more. When news reports say “the economy grew 0.4%”, they almost always mean real GDP.

Growth figures are usually given in two ways: compared with the previous quarter (quarter-on-quarter) or with the same quarter a year earlier (year-on-year). The same economy can show small quarterly growth and a larger yearly figure, so check which one you are reading.

Quarterly releases and revisions

GDP is published every quarter (three months). The first figure is a flash estimate, published about 30 days after the quarter ends: by Eurostat for the euro area and EU, and by national statistics offices such as Portugal’s INE for their own countries.

Because it comes out so fast, part of the data has to be estimated. Fuller estimates follow in the next weeks and months, and figures can keep being revised for years as tax and survey data arrive. A small first reading of growth can later turn into a small decline, or the other way round.

What is a recession?

A recession is a significant, widespread fall in economic activity: output, jobs, incomes and spending all shrinking for a while.

	What it is
Rule of thumb	Two quarters in a row of falling real GDP. Simple, widely quoted in the press, but not an official definition
Euro area	The CEPR Euro Area Business Cycle Dating Committee, a group of independent economists, dates recessions looking at GDP, employment and other measures across the euro area
United States	The NBER’s Business Cycle Dating Committee looks at depth, breadth and duration across many monthly indicators

These committees decide only after the fact, sometimes many months later, because they wait for enough data. So a recession is often recognised officially only once it is well under way, or even over.

Why GDP isn’t everything

GDP is useful, but it was never meant to measure well-being:

• It ignores distribution. GDP can grow while most people’s incomes stand still.
• It counts some things oddly. Repairing damage after a flood adds to GDP; unpaid care at home does not count at all.
• Population matters. An economy can grow simply because more people live there. GDP per person is a better guide to living standards.
• It says nothing about sustainability, such as running down natural resources.

That is why economists read GDP alongside other figures, especially the unemployment rate, which shows whether growth is reaching people’s jobs.

GDP and markets

Stock and bond markets look ahead, so they often move before GDP figures confirm a slowdown or recovery. A GDP release mainly moves markets when it differs from what was expected. Read more in what moves markets, and compare the latest GDP growth for the euro area, Portugal and the US.