Statistics seem to have ruled our lives since the start of the Coronavirus pandemic. But it seems we’re still prone to falling into statistical traps. There are two important things you need to remember when reading recent statistics:
- The earth takes 365 days to go round the sun.
- If something falls in value by 25%, it needs to grow by 33% to regain its previous value.
The first is particularly important to remember as we move out of lockdown. Journalists seem keen to use annual figures – currently that means that, apparently, the UK economy is growing at a record pace, the stockmarket is roaring ahead, and inflation is busting out. Yes, the earth takes a year to go round the sun, but the Coronavirus doesn’t care about that! The impact of the pandemic was first felt over a year ago; if I was writing this post a year ago, I’d be reporting that the economy would be shrinking, the stockmarket plunging and inflation hitting all time lows! So, in order to measure the effect on the economy and the stockmarket, we need to look at data over more than a year.
The second statement is an important, if dull, bit of maths. But it’s particularly relevant to the economy and the stockmarket at the moment. The UK economy shrank by roughly 10% in 2020, so it will need to grow by 11% to recover to pre-2020 levels.
Between 17th January and 23rd March 2020, the FTSE 100 fell by 35%; it needs to grow by 54% to recover to its 17th January 2020 high; it was still 9% short on Friday 14th May 2021, despite having grown by 41% from its low point.
So, when you read that the UK economy has grown at its fastest rate since the war, or that the FTSE 100 index has increased by 23% over the last year, think about what came before, and how much growth is needed to make up for previous losses.
If you are interested in looking more closely at statistics, we suggest you follow Tim Harford – subscribe to his BBC Sounds Podcast “More or Less” or read his book “How to Make the World Add Up”.
Philip Wise | firstname.lastname@example.org
Managing Director and Chartered Financial Planner