Deflating Deflators

If there is significant news in the Q4 GDP figures I’d go with the downward revision to the GDP deflators; positive supply-side news since the deflators were not looking great before.

I enjoy looking at the historical data; the annual GDP deflator for 2012 at 1.3% is the fifth lowest on record (after 1954, 1959, 2000 and 2009).  Will the hawks celebrate this impressive result?

In the picture of tight money below, fiscal fiddling with the VAT rate shows up as the large divergence between the GDP (market price) and GVA (basic price) deflators between late 2008 and 2012.

UK GDP and GVA Deflator. Source: ONS Series YBGB , CGBV

 

UK 2012 Nominal GDP

The second estimate of GDP for 2012 Q4 is out, and we now have the first estimate of NGDP for that quarter along with annual NGDP data for 2012.

2012 saw the second lowest annual nominal GDP growth on record, after 2009.  Here are annual data for the last five years, as usual showing both market prices (GDP) and basic prices (GVA) to highlight the impact of indirect tax changes which push up the former:

Year	Nominal GDP	GDP Deflator	Real GDP	Nominal GVA	GVA Deflator	Real GVA
2008	2.0	3.0	-1.0	2.5	3.4	-0.8
2009	-2.7	1.3	-4.0	-2.0	2.1	-4.1
2010	4.6	2.8	1.8	3.5	1.7	1.8
2011	3.4	2.4	0.9	2.4	1.4	1.0
2012	1.5	1.3	0.2	1.7	1.5	0.2

Here is the breakdown for the last four quarters, quarterly change at annualized rates:

Year	Nominal GDP	GDP Deflator	Real GDP	Nominal GVA	GVA Deflator	Real GVA
2012 Q1	1.6	1.9	-0.3	3.4	3.5	-0.2
2012 Q2	-3.1	-1.5	-1.4	-3.8	-2.3	-1.3
2012 Q3	6.6	2.3	3.9	7.2	3.1	4.0
2012 Q4	0.4	1.5	-1.0	-1.2	0.0	-1.0

This is what tight money looks like in pictures:

UK Gross Value Added.  Source: ONS Series ABML, CGBV, ABMM

Finally the updated market monetarist “NGDP gap” chart, the hole gets ever larger:

UK Nominal GDP versus Trend

On UK Hourly Wages

For Scott: I thought I’d done a post on this before but I had only prepared the graphs.  The ONS does not have an “official statistic” for nominal hourly wages, but they do publish some data in a spreadsheet in the Labour Market stats, which is updated quarterly.  The latest data available is from November 2012 [Excel spreadsheet], and comes with this caveat:

IMPORTANT NOTE REGARDING LFS EARNINGS ESTIMATES

Gross weekly and hourly earnings data are known to be underestimated in the LFS. This is principally because of proxy responses.

Also, respondents whose hourly pay is £100 or over are excluded from the estimates.

Graphing Scott’s preferred metric of tight money, mean nominal hourly wages to per capita NGDP works out as follows:

UK Hourly Wages to Nominal GDP

For that graph, I used the mean hourly wages from the above spreadsheet, the NGDP nominal GVA data from ONS series ABML [edit: note this is Nominal GVA at basic prices] and a population count from ONS series MGSL, which is 16+ population.  This is not ideal since both MGSL and the hourly wage data are not seasonally adjusted, whereas YBHA is.  If there is better data available please let me know!

The above is not a perfect fit for the unemployment rate, but it’s not bad.

UK Unemployment Rate. Source: ONS Series MGSX

This is Not What “Recovery” Looks Like, Sir Mervyn

Mervyn King phoned tonight’s speech in from his alternate universe, telling us in no uncertain terms that UK demand policy is just fine, and therefore our problems must be purely supply-side.

Maybe he took the hint from the nice Canadian chap that UK demand policy is totally wrong?

Maybe he can see the way the wind is blowing, that his best friend, the “flexible inflation target”, is being left for dead?  And his legacy, the “independent” Bank of England, will be stripped of  discretionary control over demand policy, after it abused this power and caused such great harm?

“It must be supply-side!”… is this Merv-the-swerve’s final swerve?  Roll the speech:

Second, the inflation target is not an impediment to achieving recovery today. It has not prevented the MPC from taking measures to combat the downward momentum in the economy following the shock of 2008. It is precisely because inflation expectations have so far remained firmly anchored that the MPC has been able to respond flexibly to weak demand. So the challenge we face is not the inadequacy of the framework, but the fact that there is no easy route to recovery after a major banking crisis. Recovery is inevitably slow and protracted. The healing process will take time, and patience is not a quality associated with our political debate.

Patience and a sense of realism are sometimes mistaken for fatalism. Our economy is recovering, more slowly than we might wish, but we are moving in the right direction. The Bank has not been, and will not be, inactive. Low interest rates will not be withdrawn prematurely, but we should not rely solely on general stimulus to aggregate demand. If we embark on the type of [supply-side reform] programme I have outlined tonight, I believe we can roll back the black cloud of uncertainty darkening the outlook for demand, allow the rays of supply optimism to peer through, and sustain a recovery based on a successful rebalancing of the UK economy.

When you keep saying things like “our economy is recovering”, “we are moving in the right direction”, it is best if they are least vaguely true.

It is best if you do not say things like that after you encourage the economy to crash into a “double-dip recession”, which you denied was even happening at the time.

It is best if you do not say things like when the economy is probably going through a “triple-dip”, a minor event you predict yet choose to ignore.

It is best if you do not say things like that after you advise Her Majesty’s Government to tighten the fiscal stance on the promise of an offsetting loose monetary policy which you fail to provide.

It is best if you do not say things like that when you are the Governor of the Bank of England who has presided over five years of the slowest nominal demand growth on record.

Mervyn King’s Real Legacy. Source: ONS

UK 2012 Q3 GDP, Quarterly National Accounts

The “month 3″ GDP update for 2012 Q3 was published just before Christmas, so here I’m just catching up.

The QNA resolve what was something of a mystery – the GDP figures had previously shown strong nominal demand growth in 2012 Q2 with a very large deflator, leaving falling real GDP in that quarter.  This has now been revised away.  So here is the full breakdown for the quarterly growth rates over the last four quarters, figures are Seasonally Adjusted Annualized Rates as normal:

Year	Nominal GDP	GDP Deflator	Real GDP	Nominal GVA	GVA Deflator
2011 Q4	2.1	3.0	-1.1	2.3	3.5
2012 Q1	0.8	1.9	-1.0	1.5	2.3
2012 Q2	-1.0	0.4	-1.5	-1.3	0.4
2012 Q3	7.0	3.0	3.8	7.3	3.5

A few things of note:

a) The distortions between growth of nominal GDP at market prices and nominal GVA at basic prices (ex indirect taxes) are significant even in 2012.  I am not sure how to explain this; we have had some duty changes (alchocol, fuel) but these are mostly upward, yet here we see basic prices (ex taxes, GVA deflator) rising faster than market prices?  I’m confused, if anybody has any insight please leave a comment.

b) The very strong demand growth in Q3 has a favourable real/inflation split.  This is a kick in the teeth for the supply-side pessimists, in my view.  If the supply-side pessimists were really correct that kind of quarter should not happen.  I’d embrace a couple of years targeting a 7% NGDP growth path on that basis, 4% ish real growth and 3% ish inflation is just fine.

Looking at the broader view of year-on-year growth, again the supply-side is not looking quite as bad as in the month 2 update:

Breakdown of UK Gross Value Added (Basic Prices), Annual Growth Rates.

That chart uses the GVA basic price data to avoid the VAT distortions; output growth is tracking demand growth, with the deflator “wedge” just creeping up above 2% again.

Finally I’ll zoom out to the market monetarist’s chart of epic macro policy failure, the graph which must eventually be co-opted by all monetary policy experts as the true expression of their long held views.  We’re 15% below the old NGDP trend growth path and not really getting much better.

UK Nominal GDP vs Trend Growth

The Pendulum Economy

The chorus of scepticism about UK NGDP targeting which has surfaced in the press since Carneymania deserves a response, which I’ll attempt at some point in the new year.  The Q3 Quarterly National Accounts have also resolved some mysteries in the national accounts, that also deserves a post.

Without the time for any of that, I’ll end the year with a graph I thought was interesting, if probably not in any way significant:

UK Domestic Expenditure versus Net Trade

This breaks down real GDP into real gross domestic expenditure (consumption plus investment) and separately real net trade (exports minus imports).  I thought the pattern of swings since 2008 was curious; from falling domestic spending plus a positive net trade balance in 2008/9, to the inverse combination in 2010, then flipping back and forth again in 2011 and 2012.

And with that I’m done for the year… Merry Christmas!

UK 2012 Q3 Nominal GDP

First, Mark Carney!  The most interesting thing about Mark Carney is that he is not Paul Tucker.  If Osborne wanted more of the same from the Bank of England he would have picked Tucker.  But Osborne apparently went to some effort to hook Carney instead.  Significant?  Maybe not, maybe Carney is just the better candidate and there’s no more to it than that.   Plus Osborne got to score points over Ed Balls, who looked dazed and confused in Parliament yesterday as he tried to work out what to say.  “George did something right?  Now what do I say?”

And on to the GDP figures.  Everything you’ve read about a “bounce back” in Q3 after a holiday-ridden Q2 is still totally wrong.   We have two measures of demand growth to choose from: nominal GDP at market prices and nominal GVA at basic prices.  I prefer the latter for the UK; it measures spending (and hence revenue available for production) net of indirect taxes, so is not distorted by the VAT changes.   On the basic prices measure, Q2 demand growth was stronger than Q3.  And distortions between basic and current prices persist.  Quarter-on-quarter growth at annualized rates, seasonally adjusted:

Year	Nominal GDP (Market Prices)	Nominal GVA (Basic Prices)	GDP Deflator	GVA Deflator	Real GDP
2012 Q1	0.0	0.5	1.1	1.5	-1.2
2012 Q2	4.1	4.7	5.6	6.5	-1.6
2012 Q3	4.9	3.8	1.1	-0.4	3.9

So, good news: we had another quarter of reasonable demand growth (insofar as c.4% is “reasonable”) and the GVA deflator was negative.  Bad news, the Q2 deflator shock has not been revised away.

Taking a slightly wider view, the GDP statistics are looking awful from both a demand and a supply-side perspective.  There has been a slight recovery in demand growth, but no output growth to go with it.

UK Gross Value Added at Basic Prices.  Source: ONS

That is not a pretty picture.

What’s the Fiscal Multiplier, UK Edition

The IMF have apparently converted to the Keynesian view.

Having found no inspiration from trying to think about how deficits could determine the level of nominal GDP, I took at look at the UK government spending data.  This table shows the percentage growth over four quarters in the levels of nominal GDP, nominal government final consumption spending, and nominal government gross capital formation:

Four quarters to	Government Final Consumption	Government Gross Capital Formation	Nominal GDP
2009 Q2	2.8	14.2	-4.6
2010 Q2	3.4	1.0	5.5
2011 Q2	-0.3	-7.7	3.7
2012 Q2	4.9	-0.9	2.1

So… what’s the fiscal multiplier?  I’d suggest these series are not strongly correlated.

UK 2012 Q2, Quarterly National Accounts

Some significant GDP revisions to quarterly rates in the Q2 Quarterly National Accounts this morning, though the levels remain roughly the same.

The ONS seem to have moved a chunk of nominal GDP previously counted towards Q1 forward to Q2.  Annualized quarterly growth rates here, showing both GDP at market prices and Gross Value Added at basic prices so as to “look through” the effect of VAT changes in 2011 as usual (market prices include VAT, basic prices do not):

Quarter	Nominal GDP	Real GDP	GDP Deflator	Nominal GVA	Real GVA	Implied GVA Deflator
2011 Q1	6.2	1.9	4.2	4.2	2.4	1.8
2011 Q2	1.7	0.3	1.5	1.2	0.7	0.5
2011 Q3	2.2	2.1	0.0	1.1	2.2	-1.1
2011 Q4	2.2	-1.4	3.8	2.5	-1.1	3.6
2012 Q1	0.0	-1.2	1.1	0.5	-1.1	1.5
2012 Q2	4.1	-1.5	5.6	4.7	-1.6	6.4

The implied deflator on GVA at basic prices has been revised from very very bad to utterly horrendous in Q2.  More revisions likely?

That said, if we use nominal GVA as the best proxy for aggregate demand, a +4.7% annualized growth rate is actually the best quarter for demand growth since 2008 Q1.  Headlines you won’t read today: “UK aggregate demand soars in Q2″.

UK Debt & Deficits: Nominal GDP is the Elephant in the Room

The UK’s fiscal debt and deficit targets are again in question.  The well-worn story goes that there can be no deficit reduction without growth, and growth is zero-to-negative, so there can be no deficit reduction.  Well, OK, but it is nominal GDP growth which we care about.  Tax revenues follow nominal GDP, and it is nominal GDP which is the denominator in the debt/GDP ratio.  David Beckworth has illustrated how clearly this plays out in the Eurozone.

Real GDP growth is almost irrelevant in this context.  A few years of 1980s-style 8-10% nominal GDP would (given continued moderation in public spending growth) eradicate the deficit in just a few years, even if there was no associated real GDP growth.  So economists who only ever talk about the real GDP numbers, and draw conclusions about the deficit or public sector debt/GDP, miss the elephant in the room.

On this subject I am fascinated by the game theory of fiscal vs monetary policy, and loved this 1996 paper by Simon Power and Nick Rowe on policy coordination, courtesy of Lars Christensen.  It seems remarkably prescient.  We clearly do not have well coordinated policy at the moment; the Treasury is “trying” to run smaller deficits, but the Bank of England keeps suppressing NGDP growth so as to avoid overshooting its inflation target too much.  And because the Bank “moves” (sets policy) every month, the Bank wins, and the Treasury loses – to oversimplify a bit.

Here’s a graph showing how badly the Bank has performed against the OBR‘s forecasts for NGDP growth used in the fiscal plans.  The OBR keep revising their forecasts down, and are currently expecting 3.3% NGDP growth for calendar year 2012.  To hit this starting from the sub-2% annualized growth rates seen in Q1 and Q2, a sharp jump will be required in Q3 and Q4.

UK Nominal GDP vs OBR Forecasts. Source: OBR, ONS.

A scary prospect here is the negative feedback loop.  The OBR become more pessimistic about the supply-side over time as their growth forecasts are missed, and lower their estimate of potential output.  This requires the Treasury to consider more of the deficit “structural” and less “cyclical”, and tighten the fiscal stance.  When this is done by raising indirect taxes it pushes up inflation, as happened in 2011 with VAT and numerous smaller duty changes.  The Bank of England then see higher inflation, downgrade their own estimate of potential supply capacity, and presume we don’t need more demand stimulus.

Inflation targeting done badly is really, really bad.