What Would Irving Fisher Say?

May 19, 2015 1 comment
UK in "Deflation".  Source: ONS, Quandl, Nationwide.

UK vs “Deflation”. Source: ONS, Quandl.

If you compared two periods:

1) Period One, where nominal asset prices fell 15%, nominal incomes fell 4%, the labour market was contracting sharply … oh, and the CPI rate was usually above 3%.

2) Period Two, where nominal asset prices are at all time highs, rising 5-10% p.a., nominal incomes are rising 3-4%, the labour market is expanding rapidly… oh, and the CPI rate was slightly negative.

… which period would you call “deflation”?

Categories: Data, Inflation

The hidden 2011-2 “investment” boom?

May 18, 2015 7 comments

To keep my comment section happy, here is some “productivity scepticism”.  I like this theory from Paul Donovan of UBS discussed in a Guardian article, here quoting Donovan:

“In 2000, 32% of UK businesses were employers. By 2014, 24% of UK businesses were employers. This raises the obvious question of what on Earth 76% of UK businesses were doing if they were not employing anyone – and the answer of course is that they were single person businesses where the owner was the sole person ‘on payroll’.

This matters for capital spending, because people setting up as self-employed – for example, as a consultant – may well make little or no upfront investment in kit. Says Donovan:

“If you are a self-employed consultant, you probably already have a laptop, have a car, have an office at home. As the boundaries between home and work blur, we are making better use of the capital we have got.”

“What this means is that investors looking for a “capex recovery” may be missing the point. The secret capex story may be that businesses make better use of non-business assets, and that part of the capex cycle … masquerades under a ‘retail sales’ pseudonym.”

One of the puzzling parts of the UK productivity puzzle is the divergence of employment and output during late 2011 through 2012, when output barely grew and employment soared.  If output and employment are both growing we can use the “low-skilled labour supply shock plus composition effect” theory to explain slow average productivity growth, but that doesn’t work well for this period.

We can (partially) resolve this problem by revising up 2011-2 real GDP, and Donovan’s theory could help here.  2011-2 saw a self-employment boom; if capital investment by the self-employed shows up only as consumption, or not at all, then measured GDP was too low.  The recovery in household consumption of durable goods has been much stronger than total consumption, up 19% from 2008 Q1 to 2014 Q1 versus 2% for the latter.  One of the upcoming ONS methodology changes is to remove a £500 lower bound on what counts as capital spending in the business investment survey, perhaps this will help.

UK Self-employment vs Durable Goods

UK Self-employment vs Durable Goods.  Source: ONS MGRQ , UTID

File under “grasping at straws” if you prefer.  There are good reasons to be sceptical there is any significant bias in measuring GDP, and other survey indicators (PMIs etc) suggest the 2011-2 quasi-depression was roughly that.  Stories about the unemployed being pushed into “false” self-employment could make us doubt the jobs data instead, though again it would be surprising if that was sufficient to explain such a large shift in the labour market surveys.


Categories: Data, Productivity

2015 Q1 wages update (or, there is not much inflation)

May 13, 2015 5 comments

What do you expect to happen with a 2% inflation target, if productivity growth falls from 2% per annum to 0% per annum?  You expect tight money.  Nominal wage growth must be pushed down from 4% to 2%.  If nominal wages are sticky you’ll need a nasty blast of unemployment to achieve this.  But the labour market will adjust eventually to the new equilibrium.  This is the EARN08 table which tracks one measure of nominal hourly wages, updated today, steadily tracking below 2% average growth since 2009.

ONS Nominal Hourly Wages, "EARN08" table.

ONS Nominal Hourly Wages, “EARN08″ table.

Alternative view using nominal weekly wages, with the arrow highlighting that dangerous inflection point in Britain’s inflationary wage/price spiral which prompted Carney and other MPC members to insist last year that Bank Rate would soon rise:

Nominal Private Sector Average Weekly Wages.  Source: ONS

Nominal Private Sector Regular Weekly Wages. Source: ONS KAI7

Of course everybody knows that productivity growth will pick up to 2% per annum again, slash return to the pre-crisis trend, and then wages will rise 4% per annum again, slash soar into the heavens, and everything will be just fine.  See also, Bank of England productivity forecasts today.

Welcome to Britain, have a nice day!

Update on that supply shock

May 13, 2015 Leave a comment

An update on a previous post.  Independent forecasts for UK real GDP growth in 2015 are exactly the same as before the oil price collapsed.  From HM Treasury’s collection of forecasts from last month:

HM Treasury Average of Independent Forecasts, April 2015.  Source: HMT

HM Treasury Average of Independent Forecasts, April 2015. Source: HMT

The median real GDP forecasts from the Bank are now slightly lower than August last year, when the oil price was above $100.  Carney claimed there was an “unambiguously positive” effect of falling oil price… doesn’t look that way.  Even if the falling oil price lowered forecast unemployment – not impossible as before, go from lower forecast inflation to less tight monetary policy to jobs – there has been an offsetting negative drag on expected output – maybe losing more jobs in the North Sea?

BoE Median Forecast for Real GDP Growth

BoE Median Forecast for Real GDP Growth. Source: BoE

Categories: Bank of England, Data

Are we nearly there yet? (redux)

May 13, 2015 Leave a comment

As usual it doesn’t take long for the OBR employment forecast to look too low.  Labour market data covering the three months to March out today:

UK Total in Emplomyent, OBR Forecast & Trend, Outturn

UK Total in Emplomyent, OBR Forecast & Trend, Outturn. Source: ONS MGRZ, OBR Budget 2015 EFO

Employment has hit the OBR’s estimate of trend employment.  I’m not sure if this is a first, due to the ONS revision to population estimates last year, the current labour market data is not comparable with old OBR forecasts.  Another upward revision to the OBR’s trend seems not unlikely.

Hours worked are slightly weaker than forecast.  It’s going to be interesting to see what happens to average hours.  The OBR thinks the rise in average hours since 2010 is a cyclical blip in a structural downward trend.  We’ll see.  If welfare reform is driving up average hours, and is one of the reasons that average productivity is not growing (due to a composition effect), let’s hope the OBR is wrong on this too.

Average Hours, Forecast vs Outturn

Average Hours, Forecast vs Outturn. Source: ONS YBUV, OBR Budget 2015 EFO

Categories: Data

Bank of England forecast error

May 8, 2015 7 comments

Or, the guv’nor at least.  The Guardian on Mervyn King circa early 2010 on the Tories circa 2015:

“I saw the governor of the Bank of England [Mervyn King] last week when I was in London and he told me whoever wins this election will be out of power for a whole generation because of how tough the fiscal austerity will have to be,” Hale said in an interview on Australian TV reported by Reuters.

A little indifferent to the headline result here, but sad to see so many true liberal voices leaving Parliament.  You’ll be missed, Vince.

Categories: Politics

The Supply Shock is Coming… in 2016(!?)

February 19, 2015 2 comments

Carney has stuck by his line that the falling oil price is “unambiguously positive” for the UK economy, repeating it in the Inflation Report last week   The oil price collapse started in September 2014.  I’ve charted here the latest three median forecasts produced by the Bank in each Inflation Report, for both CPI inflation and real GDP growth:

BoE Median CPI Forecast

BoE Median CPI Forecast

BoE Median Real GDP Forecast

BoE Median Real GDP Forecast

What do we see?  A huge downgrade to the expected path of inflation concentrated on 2015.  You do not see revisions like that very often.  At the same time we have a very slight downgrade to real GDP growth over the year to 2015 Q1, and a rather small upgrade, mostly in 2016.  So, the “unambiguously positive” effect seems a bit ambiguous to me, less a Draghi-esque “with low inflation, you can buy more stuff“, but something more like: “with low inflation, a year later you can buy more stuff.”

Here’s a crazy theory – let’s call it the Bernanke, Gertler, Watson theory.  The effect of the falling oil price has little to do with oil, or even the relative price of oil, but is mostly a reflection of the central bank’s reaction to the effect of the oil price on headline inflation.  Though interest rates are definitely ambiguous, in September 2014 the Bank was expected be raising rates from early 2015.  Today, the MPC is not expected to be raising rates until late 2016.  The Bank’s CPI/RGDP forecasts are based on the market curve, and the forecast model will have “lower rates for longer” cause faster growth.

Alternatively we could look at the “unambiguously negative” effect of the rising price of oil in 2011 on the Eurozone: similarly, very little to do with oil, and everything to do with the ECB’s reaction to the rising oil price: two rate hikes aimed at slowing AD growth and inflation.  They declared that policy a success!

Really, no big surprises here.  An honest Governor could confess: “The falling oil price is a good thing because it means the MPC is less likely to screw up like it did in 2008 and 2011″ – although he might look a little foolish.


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