Never mind about voting, it’s NGDP day. Usual caveat first: the quarter-on-quarter growth rates for nominal GDP tend to be unreliable in early estimates. That said, the data in the second estimate of GDP for 2014 Q1 has nominal GDP growth slightly slower than in the second half of 2013, but still respectable at a 4.9% growth rate. Here’s the table for q/q growth at annual rates:
2013 Q2 still stands out as particularly weird there, with strong RGDP but massive deflation. It seems possible the ONS has struggled to balance income, spending and output measures in that quarter, with timing of bonuses a distortion due to the higher rate tax cut kicking in.
The chart below shows year-on-year growth, switching to GVA to factor out the impact of indirect tax changes on prices:
Real output continues to track growth of nominal demand very closely; the broadest measure of “inflation” across all of GDP (the implied deflator) continues to run below 2% year-on-year even as demand growth has picked up.
The ONS published the first nominal GDP figure for 2013 Q4 this week, and so we have calendar 2013 too. Quarterly nominal growth rates continue to be erratic with revisions appearing to move nominal growth around between quarters; so I think we should not to put too much emphasis on the quarterly growth rates. However, the good news is that NGDP growth has picked up to 4.5% over the year to Q4, from a sub-2% low in the second half of 2012.
Here are the annual growth rates for the last six years, nominal, real and deflator growth, with nominal GVA at basic prices (and deflator) included to show the distortions from indirect tax changes:
This graph shows year-on-year quarterly growth:
Contrary indicators do remain for the “strong nominal growth revival” thesis: growth of nominal imports is fairly slow (2.4% ex oil over 12 months to Q4), as is growth of income tax receipts (OBR says 3.2% ex special factors), and the labour market slowed a little in December, though the LFS monthly sampling effects may distort this.
On that last point, Ben Chu tweeted a good chart showing how unemployment has changed for each of the three cohorts surveyed; the headline unemployment rate being a rolling 3m average. The fall in the headline rate is driven by two of the cohorts seeing a 0.6% and 0.7% fall in unemployment over just three months to October and November respectively. Which seems almost too good to be true. The collapse in the claimant count is perhaps the most convincing reason to believe that the labour market really is doing so well.
Looking forward, the ECFIN ESI confidence indicator rose in February to its highest level since 1989. Should we call it the Carney boom… or the Osborne boom? You decide. But where is that 4%+ output growth?
The ONS delivered a variety of Christmas presents this week in the form of the labour market data (which is very good, per Lars), and the Q3 national accounts. There is bad news and good news in the GDP revisions.
First the bad news: the impressive Q3 nominal GDP growth rate has been revised down from 6.9% (q/q annualized) to a still-respectable 5.7%. The good news is that the level of nominal GDP has been revised up for recent quarters. This moves the year-on-year growth rate up from 3.8% to 4.5% over the four quarters to 2013 Q3.
The “double-dip recession” has reappeared at the beginning of 2012, though the latter half now looks better. The revisions make 2012 look even stranger; Q4 nominal GDP was revised up to a growth rate of +5.5% (annualized) and yet real GDP growth is still recorded as falling that quarter!
Here is the data, table at quarterly rates of GDP (annualized), and chart of annual GVA growth, as usual:
There are few things I hate more than reading headlines saying “GDP growth driven by X” – especially where X is usually something deemed “bad” like “consumer spending”, or “household debt”, or “rising house prices”. There is much fallacious thinking packed into these headlines, and it usually plays out in the articles. “Rising spending leads to rising incomes”, “rising incomes lead to rising spending”, “rising employment leads to rising demand”, “consumers can’t spend more with real wages falling”, and so on, and so on.
All these phrases want to take the macro out of macro; incomes rise then spending rises, or vice versa. In aggregate, spending and incomes are always equal by definition at every point in time because “spending” and “income” are just two different ways to record the exchange of goods and services for money.
What really “causes” rising aggregate spending (income)? Well, of course, the expectation that aggregate spending (income) will rise. Expectations above all else… house rules.
Anyway, my point is, Larry Elliot is very confused:
Fears that Britain’s consumer-led recovery is losing momentum are increasing amid signs that the rising cost of living is hitting confidence and high-street spending.
There is no more a “consumer-led recovery” than there is an “household income-led recovery”. Expectations of income (spending) went up and hence income (spending) went up. Forget about the grossly deceptive partitioning. And do you think the falling cost of living is raising confidence in Spain or Greece, Larry? Maybe UK macro policy is just not tight enough for the Guardian econ editor, who is still addicted to the opium marketed as “price stability”?
So here is some “cheerleader for growth blogging” as a counterpoint to media doom and gloom: the EC’s Economic Sentiment Indicator update for November was published today, and it is says UK “confidence” is up slightly on October and still up in “boom” territory.
The Q3 nominal GDP figures are out. I cannot be too unhappy with NGDP growing at nearly a 7% quarterly rate. If this rate of nominal growth can continue consistently for a couple of years that is close enough to what I’d hoped we’d see.
Here is the quarterly growth profile, at seasonally adjusted annual rates:
On the annual view, I’ve used GVA not GDP to factor out the VAT changes as usual; real and nominal GVA continue to move in lock step, with the GVA deflator still stuck around 1-2% since the beginning of 2010:
And for the all-important fiscal arithmetic, for a change nominal GDP is growing faster than OBR forecasts, hence debt/GDP and deficit/GDP should come in a little better than expected.
There’s been some discussion of UK productivity recently, Simon Wren-Lewis here, Martin Wolf here, and Scott Sumner indirectly too. What I find interesting is that UK productivity exhibits such a strong positive correlation with nominal demand growth. I’ve graphed here the growth rates of nominal GVA, and market sector output per hour.
Why do we see that procyclical movement of productivity? I’ll offer three views:
1. Firstly, this is simply what we should expect to see under an inflation-targeting central bank. The inflation-targeting CB is trying to control the gap between (growth of) aggregate demand and aggregate supply. When we have a negative productivity shock (2008, 2012) the CB must drive down nominal demand growth to prevent high inflation. That’s all this data shows; Mervyn King and the supply-side pessimists will settle for something like this view. There is no AD problem per se, it’s supply, supply, supply.
That story is muddied only a little by the difference between CPI inflation (the actual BoE target) and output price/GVA inflation. GVA inflation, averaging 1.8% over the last four years, has been stabilised by the BoE arguably more effectively than the headline CPI.
2. Another view is that the GDP data is wrong, at least post-2009. The 2012 productivity collapse is genuinely weird. The fall in market sector output/hour masks the fact that hours worked soared upward, up 2.6% over the four quarters to 2012 Q4, while market sector output contracted by -0.3% over the same period. (The GDP data still show a market sector “double-dip” in 2012, offset by the positive contribution from the
savage fiscal austerity rise in the volume measure of government consumption). There are a few theories here:
a) The idea that the GDP data is wrong is neatly supported by work on measuring intangible investment (see Goodridge, Haskel et al). I find this quite compelling because it matches an anecdotal view of what is happening in some sectors, e.g. retail. With the shift towards on-line shopping; that sector is investing in intangible assets (web sites, software etc), and there is less demand for new tangible capital (shops).
b) Markit’s Chris Williamson made the argument recently that the official labour market data which is wrong. The ONS disagreed, needless to say. Given that the change in unemployment has roughly tracked the movement in the claimant count, I’m not sure how much weight to put on this idea.
c) The nominal GDP data is right, but the inflation data, and hence output and output/hour, is wrong. A pet theory of this inflation-sceptic blogger. Under five years of 1920s-style NGDP growth we have seen widespread discounting and substitution. For the latter, think about the success of UK budget hotels, airlines, and supermarkets; this is substitution between goods/services of different quality. I strongly suspect such changes are near-impossible for the ONS to capture “correctly” in the price indices, and hence measured inflation is far too high. This makes measured productivity appear to be more procyclical than it should be if we “correctly” measured inflation and output.
3) A third view… it’s demand, demand, demand. The slow growth of NGDP was simply a mistake, it was bad macro policy. Labour hoarding and hand-waving are used to explain away the productivity data. The correlation in the graph really is a causal relation, but it goes from demand to productivity; we’ll see a recovery in productivity with a recovery in AD. So jump to it Mr. Carney/Mr. Osborne.
In optimistic moments I can subscribe mostly to (3), and 2013’s apparent recovery in output along with a recovery in demand supports that argument, in my view. Martin Wolf argues the Bank can “correct… highly visible errors” on inflation later on, after “gambling on growth”. But what is a “highly visible error” if not the last five years of UK inflation?
Supply-side optimists cannot sit on the fence and pretend the 2008-201X CPI trainwreck never happened. It’s surely more convincing to argue we should take productivity – and inflation – out of macro policy altogether. Set a stable path for nominal incomes and let the supply-side puzzle itself out.
Here’s a quick look at what has happened to the UK data over the summer.
1) Forward-looking indicators: Inflation expectations have been stable and remained relatively high over recent months. This is good news, particularly given the rise in Sterling we’ve seen. 3% expected RPI is roughly consistent with 2% expected CPI. (As usual the non-reform of the RPI methodology is an annoying distortion.)
2) Indicators of current real activity were strong for July and even better for August, with the aggregate PMI hitting an all-time high. This leaves a little egg on the faces of the supply-side pessimists, in my view; arguments that we should have been raising interest rates because low real growth was the “new normal” are starting to look a bit silly. But that argument can always turn into one about “unsustainable growth” and bubbles, and will no doubt continue.
3) Labour market. Official data has only caught up to the May-July period; optimism there in that employment and total hours worked continue to hit record high levels, the latter rising 2.5% year-on-year. On the other hand the optimism, the claimant count and unemployment rate are falling, but only very slowly. August survey data looks very strong for the labour market too.
4) The really interesting question: is there a demand-side explanation for a real recovery? There could be two sources for a real recovery:
a) An adjustment to very slow nominal growth. Two pieces of supporting evidence here: firstly that nominal hourly wage growth has been pushed down to very low rates. Secondly that the GVA deflator in Q2 suggested that whole-economy price inflation was negative q/q to Q2. But neither of these data points are conclusive. The wage data has been distorted by timing of bonuses against the higher rate tax cut. And the deflator is particularly unreliable in early estimates. Here’s the graph of the Eurostat nominal hourly wage data and the ONS estimates, anyway:
b) An alternative explanation is a recovery in nominal demand growth. Two main pieces of evidence again here: the rise in equities, the FTSE 250 is up 30% year on year; and the rise in inflation expectations mentioned earlier. The fact that real activity has apparently turned so sharply around does in itself suggest a demand-side change.
The Q3 nominal GDP data will be of particular interest.