It’s Really Demand
Richard Williamson, Steve Waldman and others have produced some interesting posts about the UK economy. The CPI numbers tell a confusing story about AD, and people would like to explain this.
Chris Dillow’s response to my call for an NGDP target raised the (persistent) suggestion that the UK supply-side is not able to keep up with demand growth. This puts Chris in the same position as that held by inflation hawks like Andrew Sentance, I suppose – an odd alliance.
Jason Rave’s analysis is probably my favourite, as he nails inflation targeting as the source of all this woe, advising that we should ignore the “inflationary illusions“. Here, here!
I don’t really have much to add to all this discussion, but I’d like to attempt a quick defence of the much-maligned UK supply-side.
If we take the liberty of ignoring the effect of the VAT changes as Whitehall takes a larger cut of nominal spending, a supply-side constraint on demand growth just does not look that obvious. This graph shows the annual rate of change of both nominal GDP at basic prices, and real GDP (note this is the change over four quarters, not the more volatile quarter-on-quarter rate of change):
UK Nominal GDP at Basic Prices vs Real GDP. ONS series ABML, YBEZ
In 2011 as a whole, NGDP at Basic Prices – the income actually available to produce new stuff – increased just 2%. And there was a 0.7% increase in output. Is that really such a terrible supply-side performance?
So I think the VAT change is perfectly sufficient to explain the size of the “wedge” between 2011 NGDP (a pathetic 3% even including VAT) and output growth, and the UK supply-side performance gives little evidence for pessimism about whether faster demand growth would only be inflationary.
Hi Britmouse
This is very interesting, where did you get the NGDP at basic prices data? I would love to plot that against US NGDP. It’s clear to me now that if there is a puzzle at all between the two countries, the answer would appear to lie in 2009. NGDP growth is clearly sufficient to explain the anaemic performance of the recovery more recently.
Thanks
Richard
Hi Richard. The data is in here:
http://www.ons.gov.uk/ons/datasets-and-tables/data-selector.html?table-id=A2&dataset=qna
The series code for NGDP at Basic Prices is ABML.
The distortions between NGDP at Basic Prices and at Market Prices start in 2008 Q4 with the VAT cut in December that quarter.
It’s become clear to me the VAT has screwed things up far, far more than I thought. UK NGDP is about 5-6% further below trend compared to the US. I’m revising my belief that there is much going on in the supply department.
Britmouse, this is very interesting…this has not gotten enough attention!