Archive for July, 2013

Headlines You Won’t Read Today: “Central Bank Misses Forecasts By Slightly Less Than Usual”

July 25, 2013 3 comments

Outturns, plus Bank of England forecasts in May 2012 for inflation and real GDP growth over the four quarters to 2013 Q2:

Forecast  2.3% 2.5%
Outturn  2.7%  1.4%
Error  +0.4% -0.9%


Categories: UK GDP

On the UK Labour Market “Mystery”

July 25, 2013 1 comment

I’m genuinely confused by Simon Wren-Lewis’ post on “Behaving Like Luddites” and wanted to offer a decent response.  A reasonable but condensed version of Simon’s argument, is, I hope:

Bad demand-side policy has caused UK output to stagnate.  Due to a supply-side problem of falling productivity, employment has risen strongly – but this is not something we should celebrate.

I have a few problems with this:

1) I could apply exactly the same logic to the early 1980s, and I don’t think Simon would endorse that view.  i.e. “In the initial recovery from the 1979-81 recession, real GDP grew fast.  It’s true that unemployment carried on rising until 1984, but this was due to a huge rise in productivity, not bad demand-side policy.”  That argument seems completely consistent with using “changes in productivity” as an “excuse” for the employment data post 2010.  (Yes, this comparison is over-simplified.)

2) Is it not fair to distinguish demand-side shocks which impact employment from other shocks which impact output – and isn’t it fair to consider exactly what shocks are hitting the UK?  Supply shocks such as the 1973 oil shock did not impact employment; the lowest recorded point on the ONS series for the unemployment rate is in late 1973 when the UK had been in recession for two quarters.  That was a supply-side recession with low output and very high inflation.

3) If you look at the breakdown of GDP by income in the national accounts, it is not quite so obvious that rising employment is really a “mystery”.  Here’s one view:

Year Per
2009 -1.7 0.9 -2.9 -1.6
2010 1.2 2.6 0.5 0.2
2011 1.4 1.4 0.4 0.5
2012 1.7 0.4 2.0 1.2

% Annual growth.  Source: ONS.

This is derived from Scott Sumner’s “musical chairs” model as in earlier posts, and I am merely ripping off Scott’s many posts on this subject as usual in this post.  What is surprising in the above table is that since 2010, even on a per capita basis, we’ve see a rising growth rate of “labour income” – defined as total wage income for employees plus mixed income, albeit still at low rates.  It seems possible based on that data to claim that:

a) flexible nominal hourly wages plus rising nominal incomes is a sufficient demand-side explanation for rising employment and actual hours worked,

b) hence, the stagnation of output, and particularly output per hour worked, is at least partly the real mystery with the UK macro data (pun intended)

For many countries in the Eurozone I’m sure you could make the claim that fiscal austerity has caused people to do less work, and find confirmation in the macro data.  At least for 2012 in the UK, you’d have to claim that fiscal austerity has caused people to do much more work producing the same amount of stuff.  That sounds like a supply-side effect, not demand-side.

My bias is that there’s probably a measurement problem with the price indices, i.e. the NGDP figures are roughly right but we are getting the real/inflation split badly wrong.  I see deflationary trends wherever I look.  But the supply-side pessimists have an argument which must be attacked analytically rather than idly dismissed.

This was a rambling post already, but, lastly, 2012 was a weird year if you believe all the current data.  Hours worked soared; the last time hours worked rose that fast on an annual basis was during the Lawson boom.  Yet in 2012 output rose only 0.2% rather than the 4-5% seen under Lawson.  That’s just really, really strange; dismissing such evidence because “Luddism is bad” seems much too hasty.

Categories: Inflation, UK GDP, Wages

Ed Balls Embraces “Monetary Activism”

July 22, 2013 8 comments

Ed Balls, October 2011:

“With our economy stagnated since last autumn David Cameron and George Osborne are now betting on a bail out from the Bank of England.

“The Government’s reckless policy of cutting spending and raising taxes too far and too fast is demonstrably not working. But rather than change course the Government has spent the last week urging the Bank of England to step in and essentially print more money. The Bank of England has been left with no choice but to step in and try to offset the contractionary effects of George Osborne’s Budget plans

“This is the Bank of England’s contribution to a Plan B. But while another round of quantitative easing may help, I fear it will do little to create the jobs and growth we desperately need if we are to get the deficit down. When monetary policy is already so loose – with interest rates at record lows – and with confidence depressed this is, as Keynes said, like pushing on a string.”

Ed Balls, July 2013:

Very different policies have resulted in different outcomes for the British and American economies. In the US, the combination of monetary activism and President Obama’s fiscal growth plan has helped ward off global threats, strengthened the recovery, and seen a continued fall in the deficit.

“Fiscal growth plan” is an excellent phrase, there’s so much nuance packed in there, and it avoids all the negativity in phrases like “cutting the deficit” or “fiscal austerity”.  Just take the word “fiscal” and add “growth plan” – who will notice?

Year US
2010 -8.5
2011 -7.7
2012 -6.4
2013 -4.6

Source: IMF WEO (April 2013)

All we need to do is to cut the deficit and print money – sorry – “a fiscal growth plan and monetary activism” – Ed Balls’ new “One Nation Labour” macro policy?

[Edited: added links]

There’s No Such Thing as Inflation, UK Retail Edition

July 18, 2013 4 comments

The FT report on today’s retail data starts like this:

Britons spent more in the shops last month as the UK economy strengthened, with department stores enjoying the biggest boost thanks to unusually heavy discounting.

“Unusually heavy discounting” – that means something like “cutting prices”.  Or maybe, specifically, “selling goods for below sticker prices“.

Yet what does “inflation” measure?  Does it capture sticker prices or actual prices of final sales to consumers?  My bet is that consumer price surveys fail to capture discounting in any way accurately, and mainly capture changes in sticker prices.  The ONS data has the implied deflator for retail sales rising to 1.7% in June.  Hard to square that with “unusually heavy discounting?”

A nice example of discounting is provided by Tesco. If you order your groceries on-line from Tesco (yes, in Britain, supermarkets come to you), the day after delivery you might receive an e-mail like this:

Hello, We’ve checked your comparable grocery shop against Asda, Sainsbury’s and Morrisons. Here are the results:

This time your comparable grocery shopping would have been £1.75 cheaper elsewhere, so here is a voucher for the difference.

Now the next time I shop at Tesco, I can buy goods for (£1.75/£basket value)% below sticker prices. What hope do the ONS have in correctly measuring “inflation” when retailers are sending their customers personalised discounts?  Not a hope in hell, I would say.  Oh, and this also tells me that UK supply-side pessimists are Enemies of Prosperity who are completely wrong about everything.  (Well, maybe some things).  The Telegraph quote some interesting statistics from PwC:

Christine Cross, PwC’s chief retail adviser said discounts had continued in recent weeks. “Our figures support this as an on-going trend through July,” she said. “This week, 85pc of 100 high street retailers were on sale or advertising promotions in their shop window.

“Average price discounts however are up to 59pc, compared to 55pc in 2012 and 2011 – but still well below the 70pc of 2009.”

Back to that FT article for a contribution from a City rent-a-quote:

Martin Beck, an economist at Capital Economics, sounded a note of caution, questioning people’s ability to keep spending more at a time when inflation of 2.9 per cent is still much higher than wage growth of 1.7 per cent.

“With real incomes continuing to fall, the sustainability of a consumer revival remains in doubt,” he said. “But, for now, retailers will no doubt be happy to make hay while the sun shines.”

My advice to Mr. Beck: Spending = Income, don’t take the “inflation” thing too seriously.

Categories: Data, Inflation

Hawks, Doves, and Forward Guidance

July 17, 2013 4 comments

I was right about Carney’s vote but wrong about the relevance.  The absence of any MPC member voting for QE in June raised Sterling and lowered equities; perhaps not quite as much as the MPC announcement moved us in the other direction, but still we have dumb example of “Bank offsets Bank”.  (And yes, look; expectations really do matter!)

Here are the key points of the MPC hawks’ view in the July minutes:

27.  For most members, the current policy setting was appropriate and the onus on policy at this juncture was to reinforce the recovery by ensuring that stimulus was not withdrawn prematurely, subject to keeping inflation on track to hit the 2% CPI inflation target in the medium term.

For some of these members, asset purchases remained an effective tool with which to inject more stimulus, although an expansion in the purchase programme was not warranted at this meeting. But for others, the benefits of further asset purchases were likely to be small relative to their potential costs. In particular, further purchases could complicate the transition to a more normal monetary policy stance at some point in the future.

The hawks worrying about “normalisation” are still shooting themselves in the feet. Ensuring the UK has weak NGDP growth forever means we are likely stay on the ZLB forever.  Failure to learn from Japan’s “lost decades” makes MPC members – supposedly Britain’s elite macroeconomists – look embarrassingly ignorant.

Over to the “doves”:

29.  For the other members, further stimulus was warranted. Domestic activity was recovering as quickly as envisaged in the May Inflation Report, but the pace remained too slow to begin to close the economy’s margin of spare capacity.

An expansion of the asset purchase programme remained one means of injecting stimulus, but the Committee would be investigating other options during the month, and it was therefore sensible not to initiate an expansion at this meeting. Given the already large size of the asset purchase programme, there was merit in pursuing a mixed strategy with regards to the different policy instruments at the Committee’s disposal. The Committee’s August response to the requirement in its remit to assess the merits of forward guidance and intermediate thresholds would shed light on both the quantum of additional stimulus required and the form it should take.

That last paragraph has Carney written all over it, and brings us to “forward guidance”.  This has been much discussed in the media, I’d highlight Chris Giles and Simon Wren-Lewis for anyone not already a keen reader of both.  (And I’ll take on that Luddism challenge, Simon, in another post.)

The key question for me is how Carney will bring the MPC hawks and the doves to a consensus on “forward guidance”.  What are the choices?  This is my view:

1) Do nothing.  HMT requested an “assessment” of forward guidance and “intermediate thresholds”.  The MPC could say “here’s an assessment; here are the costs and risks; we choose to exercise our operational independence and prefer no change in policy.  Thanks for the advice, George, and good luck with the election.”  I think this is highly unlikely but not impossible.

2) Something like the Bernanke/Evans rule.  Forward guidance with thresholds around real variables; keep rates low until the unemployment rate gets below 7%, or something similar.  Possibly tied to an open-ended QE program (Paul Fisher mooted open-ended QE earlier in the year).  I think this is possible, it’s clear Carney is keen on this route.  But I think there will be very strong resistance from Bank insiders and MPC members, who think this runs the risk of repeating the mistakes of the 70s and targeting a “too low” level of unemployment.

3) A Woodford/Sumner rule (if we’re going to give it a name, is there a more appropriate name?)  This means forward guidance with thresholds around nominal wage or nominal GDP growth; keep rates low until some measure of nominal wages are growing at 4%, or nominal GDP is growing at 4-5%.  Again possibly tied to a QE program.  Given sufficiently conservative (low) thresholds for NGDP or wage growth, I think it would be possible to get the hawks on board here.  MPC forecasts already have an implicit path of NGDP.  Endorse that and commit to hitting it.  Some MPC members are particularly concerned about the nominal wages, so that could be a consensus winner.

It will be a close race between (2) and (3), in my view, but if I had to bet all-in, I would pick (3) as most likely to gain support of the hawks.

There are two ways the MPC is likely to fail:

a) I cannot see how it will be possible for the MPC to form guidance around a level target rather than a rate target.  It is hard to avoid the constraint of the inflation rate target here.

b) A “thresholds” approach fails the test of proper Svenssonian monetary policy – you must target the forecast.  Scott and others have written about this many times in the context of Bernanke/Evans rule.

The reference in the minutes to “different policy instruments” is ambiguous – it may refer to guidance itself as an instrument.  But I think it’s almost certain that the MPC will engage in a significant expansion of “credit policy” at the same time as forward guidance, under the umbrella of Funding for Lending or some other disgusting banking-sector subsidy wrapped up as a “liquidity injection”.

That would represent an alignment of the New Keynesian stars, and would be no doubt celebrated by fiscalists, creditists and everybody who rejects the view that “money always matters.”  Michael Woodford specifically called out the BoE’s Funding for Lending scheme as an appropriate ZLB policy tool in his Jackson Hole speech endorsing NGDP level targeting.

So there will be no test of monetarism from the Bank; we will remain with a muddled New Keynesian policy framework and “anything but money” as the tools of policy – but with luck the Bank will produce better policy anyway.

In Japan, All That Matters is… erm, “Structural Reform”?

July 17, 2013 Leave a comment

A gem from the MPC’s June meeting minutes – yes, I’m a month behind still:

9.  Japanese output had grown by 0.9% in the first quarter. It was probably too soon for that to have reflected the impact of recent announcements on fiscal and monetary policy. A durable improvement in nominal demand growth would depend in part on the third aspect of the Japanese policy package – structural reform – but there was as yet little detail on the form that that would take.

That’s a bit scary to read.

1) They believe so much in those “long and variable lags” that they are inclined to dismiss contrary evidence even when it is staring them in the face.  And it sure is a good thing our policy-makers carefully studied the Great Depression and what happened to US industrial production in the months after FDR devalued, otherwise we’d really be in trouble.  Oh, wait.

2) The path of Japanese nominal GDP depends “in part” on… supply-side policy?  Erm, really?  What can that mean?  That the Bank of Japan does not determine the level of Yen-denominated values even in the long run?  Is it a statement of policy – that the BoJ could raise NGDP but it would not be “durable” (“only inflationary”?) unless the government also does supply-side reform?  Or is it an endorsement of “creditism”, the BoJ is “impotent” unless mumble mumble banks mumble financial system mumble mumble deleveraging mumble?

Any better ideas?  Somebody send nine copies of Bernanke (1999) to Threadneedle St., pronto.

Categories: Japan, Monetary Policy

Les Shameless Cherry-Picking Of Macro Data

July 12, 2013 12 comments

Which country has employment statistics worth writing home about?  Employment rates:

Country Youth (15-24) Prime-age (25-54) Older (55-64)
United Kingdom 47.3 80.8 58.6
United States 46.2 75.9 61.2
France 28.5 80.8 45.8

Source: OECD, 2012 Q4.

I’m presuming it can’t be the one with evil right-wingers in charge.

Categories: Data, Lazy Trolling

Data Roundup

July 11, 2013 Leave a comment

Here’s the most important point: UK inflation expectations rose significantly last week.  I don’t have high frequency data – which would show how much of this move was a direct response to the MPC statement last Thursday – but the Bank’s daily data for gilt-market implied inflation are as follows:

Date 5 Year
Wed 3rd Jul 3.1215
Thu 4th Jul 3.1925
Fri 5th Jul 3.3057
Mon 8th Jul 3.2971

The 5 year implied RPI inflation measure has now regained the March high.  Back in March this prompted the Governor to produce relatively hawkish comments on Sterling in an ITV interview.  Sterling and expected inflation continue to move in tandem; I’ve inverted the Sterling Exchange Rate Index here to show the correlation; a rising green line meaning a devaluation:

Sterling ERI and Inflation Expectations

Sterling ERI and Inflation Expectations

The non-reform of the RPI series (causing that sharp spike right at the start of 2013) continues to impair this analysis, but it seems reasonable to say that inflation expectations are consistent with the Bank continuing to hit at least 2% on the CPI, presuming a circa 1% difference between the CPI and RPI rates.  This is good news for the UK economy.  And despite the gnashing of teeth about Carney talking down the pound, the Broad Sterling index used here is still stronger than the March low.

(It is frustrating that we have to resort to divining rods to determine market CPI expectations, and that the government apparently rejected the option of introducing CPI linked gilts.)

Other interesting data:

1) The CPI rate rose back up to 2.7% in May which was celebrated by almost nobody.  (Liquidity trap? With these CPI figures? et cetera)

2) The ECFIN Business Sentiment Indicator (hat tip to Danny Blanchflower for this one, it seems to be good leading indicator) remains higher than the level we saw for much of 2012, but is still dialled to “slow growth”.

UK Nominal GVA versus ECFIN Business Sentiment Indicator

UK Nominal GVA versus ECFIN Business Sentiment Indicator.  Source: Eurostat ECFIN Bus. Sentiment Indicator , ONS ABML

3) Government tax receipts are soaring.  This is usually a good indicator, but the receipts data is so completely distorted by “special factors” (“reverse forestalling” from the 45% top rate cut; remissions from the Swiss tax agreement, dividends from the BoE),  it is hard to identify any underlying trend.  I do not envy the OBR who have exactly that task, read their commentary for more.

4) Blue Book 2013 GDP, plus revisions.  Discussed at length elsewhere.  Simon Ward claims it makes the supply-side story even worse – I’m not sure about that, the changes were mostly methodological.

Categories: Data

All That Matters is Nominal GDP, Japan Edition

July 10, 2013 Leave a comment

From the summary of “Basic Policies for Economic and Fiscal Management and Reform” from the Cabinet Office in Japan – what macro policy vision does Abe’s Cabinet have?

Macroeconomic vision that Japan should aim for in a new decade of revival

• Labor productivity growth by 2 percent or more in the medium- to long-term with a faster increase in wages than prices, accompanied by increased job opportunities

• Growth of gross domestic product (GDP) by around 3 percent in nominal terms and around 2 percent in real terms, with a higher growth rate to be set for the late 2010s

• Under the conditions specified above, it is expected that nominal gross national income (nominal GNI) per capita will grow by more than 3 percent in the medium- to long-term, resulting in an increase of 1.5 million yen or more in 10 years.

A longer policy document is also available.

Categories: Japan

Osborne’s Reverse Ferret on Gilt Yields

July 5, 2013 8 comments

I’m still catching up, and I didn’t see anybody pick up on this.  Team Osborne have long been champions of the “low gilt yields” ⇒ “confidence in government policy” ⇒ “austerity is successful” logic.  But read Osborne’s Mansion House speech, my emphasis:

And this brings me to the important question of how monetary policy should balance the ongoing need for stimulus with emerging signs of recovery.

Each step along the path must, without question, be for the judgment of independent central banks including our own. The sharp jumps in bond yields we’ve seen in too many countries in recent years have been a sign of confidence departing.

But if the recovery gathers strength then a steady rise in bond yields across the largest developed countries will be a sign of confidence returning.

The recent turbulence in financial markets has emphasised the vital importance of clear communication.

There is a risk that poor communication could lead to stimulus being inadvertently withdrawn too soon.

More clarity about the future path of interest rates could help keep financial markets more stable.

I don’t think Osborne has ever before claimed before that gilt yields are positively correlated with “confidence”.  This is a welcome development, but it does make a mockery of what he said before.  It is also interesting that the Chancellor is so openly – and apparently successfully – guiding the MPC towards “Plan Woodford”.

(Yes, “Reverse ferret” is a much better phrase than the clichéd “U-Turn”.)

Categories: Monetary Policy, Politics