Archive for August, 2013

UK 2013 Q2 Nominal GDP

August 23, 2013 10 comments

The nominal GDP numbers are out for Q2 and are weak, the impressive thing is the negative GDP deflator for the quarter – yes that’s deflation.  As usual the q/q rates are highly unreliable in this first estimate, so should be taken with a large pinch of salt.

The annual rate has improved but this mostly reflects the 2012 Q2 quarter falling out.

Last four quarters at seasonally adjusted annual rates:

Year Nominal
Deflator Real
2012 Q3 4.7 1.6 3.0
2012 Q4 3.2 4.3 -0.9
2013 Q1 3.8 2.7 1.1
2013 Q2 1.7 -1.1 2.9

And here’s the graph using nominal GVA, to avoid the VAT distortions across 2008-11:



Categories: Data, UK GDP

The Riksbank’s Catch-22

August 22, 2013 3 comments

The Riksbank continue their brave fight against employment, inflation and debt.  The July Monetary Policy Report has a lengthy discussion (pages 42-48) of the trade-off they are making; here’s a quote:

Two monetary policy alternatives have been illustrated in this article: a higher and a lower repo-rate path. During the usual three-year forecast period, the lower repo-rate path provides better expected target attainment in terms of inflation and resource utilisation. However, as a lower repo-rate path can contribute to increased indebtedness, it also increases the risk of an unfavourable scenario beyond the forecast horizon, for example in the form of a fall in housing prices in connection
with a high level of household indebtedness. This scenario entails major losses, for example in terms of higher unemployment, which in itself can also be aggravated by a high level of indebtedness at the outset.

A monetary policy that takes into account financial imbalances therefore means that the choice between the two repo-rate paths in this case becomes a trade-off between attaining the target in the short and long term: inflation’s deviation from 2 per cent and unemployment’s deviation from a normal level during the normal three-year period are weighed against the expected course of development beyond the forecast horizon (see Figure A5).

I think Yossarian would appreciate all this.  The Riksbank are deliberately missing their targets – keeping inflation below target for longer, and unemployment higher for longer.  Why?  Because if they tried to hit their targets then the bogeyman named “household debt” might jump out from underneath the bed.  So what, you might ask?  Well, if the debt bogeyman strikes, the Riksbank might miss their targets.

What is most depressing to read is that they are clearly trying to avoid the perceived mistakes of other central banks:

One way of estimating the consequences that a fall in housing prices could have for the Swedish economy is to produce a scenario based on international experience. The scenario is based on the average macroeconomic effects of a number of episodes in OECD countries where house prices have fallen and indebtedness has been high. As additional comparisons, the average course of development in Denmark, the Netherlands and the United Kingdom during the latest financial crisis is also illustrated, as well as the course of development during the Swedish crisis of the 1990s.

Failure begets failure; the lesson learnt from the UK’s failed inflation targeting regime is apparently that tight money is a good way to avoid recessions.

The Riksbank have “successfully” driven nominal GDP growth down to below 2% and headline inflation to around 0% with a well-timed series of repo rate rises:

Sweden Nominal GDP, HICP, LIBOR

Sweden Nominal GDP, HICP, LIBOR. Source: Eurostat Nominal GDP , HICP , FRED 3m Krona LIBOR



Categories: Monetary Policy, Sweden

Real Incomes = Real Hourly Wages TIMES HOURS WORKED

August 14, 2013 1 comment

One more thing.  The Channel 4 “Fact Check” blog misses a very basic but important point in analysing Labour’s “cost of living crisis” claims:

Real Income = Real Hourly Wages * HOURS WORKED

Labour are citing real hourly wage data and some survey evidence as an “attack” on Osborne’s “out of touch” (Labour’s claim) “controversial comment” (C4’s words) on real household income.  In C4’s view it is “controversial” to correctly cite ONS data?  Maybe it would be better if Osborne ignored the official statistics and went with his gut feelings?  More seriously, survey evidence on household perceptions of inflation is known to be unreliable.

The truly remarkable data point in the 2012 statistics is the change in hours worked, which rose 2%.  The changes to hours worked is the key data point in the “productivity puzzle” so people should be well aware of this.  And falling real hourly wages plus rising hours worked is consistent with rising real incomes.

If anybody can find a European country which has similar real GDP numbers to the UK and hours worked & employment data which look like the graph below, I promise to do a post being extremely nice about Ed Balls:

UK Hours Worked and Total in Employment

UK Hours Worked and Total in Employment. ONS series YBUS , MGRZ

Total hours worked and total in employment both hit record highs again in today’s data.

(By the way if anybody has a copy of the HoC Library research which Cathy Jamieson is citing, I’d love to see it, please mail me.  I could not find Eurostat series which precisely matched the cited results.)

Categories: Inflation

Lost Decade Watch, Labour Backs Churchill not Keynes

August 14, 2013 4 comments

Here is Winston Churchill discussing the “cost of living” in Parliamant, as recorded in Hansard in 1925 (via a paper by Susan Wolcott via Bob Hetzel), attacking the ideas of one Professor Keynes:

The hon. Member for Keighley was deploring a fall in prices, but what does a rise in prices mean? It means a rise in the cost of living, and what does that mean? It means a diminution, in exact mathematical ratio, of the real wages which are received by the working classes.

The Labour party echoes those words by choosing to campaign in 2013… on… wait for it… rising prices and falling real wages, the “cost of living crisis“.  Somebody in the Labour party should read Nick Rowe, if not Keynes on the economic consequences of (thinking like) Mr. Churchill.

Simon says I should hold Osborne responsible for the UK’s macro policy failure.  Did Keynes hold Churchill responsible for returning the UK to gold at a level which required a great deflation?  Keynes wrote, on Churchill’s decision:

Why did he do such a silly thing?

Partly, perhaps, because he has no instinctive judgment to prevent him from making mistakes; partly because, lacking this instinctive judgment, he was deafened by the clamorous voices of conventional finance; and, most of all, because he was gravely misled by his experts.

My emphasis.  That perfectly captures how I feel about Osborne: yes, failing to change the MPC remit is awful and stupid, but is not terribly surprising given the advice he’s had.

The Bank of England has mounted a lobbying campaign to keep the 2% inflation target over the last nine months.  Mervyn King’s choice of words for those who consider a departure from 2% CPI was downright vicious; “unrealistic”, “painful experience”, “illusion”, “terrible price”, “wishful thinking”, “the dreamers”.  And that’s before I start on Spencer Dale or Martin Weale.  If I were to summarize the MPC consensus it would be that they could target anything other than 2% CPI but it would be a very, very bad idea.

Macroeconomists outside the Bank are broadly split into two groups.  The “fiscalists” think our demand-side [edit: problems] can only be solved using fiscal policy, because monetary policy is interest rates and we ran out of interest rates.  And there’s the supply-siders who think our problems are mostly supply-side because of the CPI data (or political bias, take your pick).

There are others (like Simon) who cannot be so narrowly categorized, and have more nuanced views.  But why should HM Treasury listen to Simon Wren-Lewis and Scott Sumner and ignore Mervyn King and Charles Goodhart (who is cited twice in the remit review discussion of NGDP targeting)?  It is not credible to crucify Osborne on a cross marked “ignorant of basic economics“, when he is following the advice of experts like King and Goodhart.

I think Osborne went somewhat beyond the consensus view of modern-day “experts” in asking the Bank to do forward guidance, and he deserves quiet applause for that.  I believe a range of policy options was available to the MPC under the guise of “forward guidance” and MPC members should be held to account both for the policy choices they make, and for the policy advice they give HM Treasury.

I also think the Labour party are also being “gravely misled” by today’s experts who have convinced them that UK demand-side problems are purely fiscal “because ZLB”.  That is not what New Keynesians should say about optimal macro policy at the ZLB.  Here’s New Keynesian Lars Svensson in 2006:

Japan has certainly tried an expansionary fiscal policy. This has not led to an escape from the liquidity trap, but it has certainly led to a dramatic deterioration of Japan’s public finances.

That is the kind of thing the Labour party should be hearing from macro experts.  Oh, and drop the “cost of living” nonsense.

Reaction Roundup #3

August 14, 2013 Leave a comment

Adam Posen thinks the unemployment rate was the right focus, but that the MPC have sent the wrong signal by refusing to QEase further, with inflation on target.

Charles Goodhart explains the market reaction for the LSE blog, but I am not sure his description of market movements tells the right story; equity and Sterling reaction at 11am was consistent (equities fell, Sterling rose), and indicated the announcement was more hawkish than markets expected.  Goodhart’s closing paragraph is good.

The M&G Bond Vigilantes say the Bank’s announcement lacked clarity.  I can imagine the furrowed brows at the Bank “what couldn’t be clearer, we’re targeting inflation, unemployment and financial stability.  Don’t you get it?”

Steve Williamson picks up on a quote from a Guardian article which claimed that:

Carney said the unemployment target could be abandoned should the bank’s internal analysis show GDP growth was the cause of a rise in prices of more than 2.5% in two years’ time.

This is simply mis- or over-interpretation by Guardian.  Carney never said anything about GDP growth “being the cause of” inflation two years out.  A correct phrasing would be to complete the sentence “…should the bank’s internal forecast predict inflation of more than 2.5% in 18-24 months time”.

Joseph Cotterill at FT Alphaville has a good discussion on the MPC minutes and forward guidance.

Larry Elliott only just manages to avoid writing “expectations-augmented Phillips curve” in a blog post for the Guardian on inflation, unemployment, Osborne and UK macro policy.

Categories: Monetary Policy

The MPC Exists to Make “Difficult” Decisions

August 9, 2013 7 comments

Now I’m forced to defend Cameron against the Keynesians… it’s a joyless task being a monetarist blogger this week.

Simon says that Cameron’s comments yesterday were rather… audacious.  I wouldn’t disagree with the thrust of the argument, that Cameron is taking liberties in claiming explicit support from Carney.  A defence of Cameron would be Carney’s specific choice of wording in the press conference in response to a question from Philip Aldrick:

“There’s also obviously the rebalancing that’s necessary on the fiscal side, which is in train.”

He did not say “The government’s foolish, reckless, and unnecessary fiscal consolidation.”  He did not go the Bernanke route and openly call for more fiscal stimulus, or perhaps just less fiscal austerity.  Instead, he said “the rebalancing that’s necessary on the fiscal side.” – my emphasis, but his choice of words.

Now we have the transcript, I can also quote Carney’s response to Bill Keegan, which is most interesting on this topic.

William Keegan, The Observer: Mr Carney, the MPC is responsible for monetary policy. To what extent do you think the government’s fiscal policy is inhibiting the reduction in unemployment that you so clearly seek?

Carney: Well, a couple of things. First, what we seek is price stability as defined by the 2% inflation target. And the challenge for the MPC is to chart the best path back to that 2% inflation target, given the weakness in activity, given the slack in the labour market and given the initial conditions – given that we’re starting with inflation at 2.9%. And we fully recognise that there has been a prolonged period where inflation has been above target.

So we’re balancing the need to get inflation back, and our primary responsibility of getting inflation back to the 2% target, with due consideration for output and employment. So, just to be absolutely clear, this is about us fulfilling our primary objective, which is inflation, and given the circumstances, doing it in a balanced way.

Carney continues talking about thresholds after that.  Eagle-eyed readers might pick up on which macro variable (hint: starts with “2%”, ends in “inflation”) Carney wants to talk about in response to a question about fiscal policy.

This clearly support’s Simon’s argument that fiscal policy has made monetary policy “difficult” insofar as fiscal policy changes have pushed up the CPI.  But I really, really dislike that framing.  The whole reason we have nine uber-smart macroeconomists running UK monetary policy is that they are supposed to make “difficult but correct” decisions about UK monetary policy.  “Politically unpopular” decisions, if you like.

We did not have Gordon Brown, Alistair Darling and George Osborne running UK monetary policy for the last fifteen years because economists thought that people like Gordon Brown, Alistair Darling and George Osborne would make “easy and incorrect” decisions about UK monetary policy, and politicians were co-opted into that view.

So I am wholly unsympathetic to seeing economists criticise politicians for making life “difficult” for the MPC.   (As an aside, Mervyn King was clearly sensitive to this issue.  That is why he sat through the 2011 Inflation Report press conferences with a smug look on his face, facing down the press time and time again as they implored him to raise rates and get inflation down.  He knew that in 2011 he had an acid test of the MPC’s ability to make “difficult but correct” decisions.)

Simon is clearly right when he says:

In the UK, however, it appears that it is inflation rather than (maybe?) the (perceived?) inadequacy of monetary policy instruments which is restraining further monetary stimulus.

But this does not go far enough.  We have had an absolutely clear opportunity for the MPC to decide the extent to which inflation restrains further monetary stimulus.  I do not expect they will get such an opportunity again for a long time.  And the economists on the MPC have decided that it is absolutely correct to place low inflation above all else in steering a course for UK aggregate demand.   That is the “difficult decision” our uber-smart macroeconomists have taken, and the rest of us must now suffer from.

Politicians Hate Monetary Dominance

August 8, 2013 5 comments

George Osborne, March 2009:

The Shadow Chancellor described the decision to effectively print more money as a “last resort”, necessary because of the “complete failure” of Labour’s other measures to tackle the recession.

He told BBC News, “I don’t think anyone should be pleased that we have reached this point. It is an admission of failure and carries considerable risk.”

Ed Balls, October 2011:

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

Ed Balls, August 2013:

But of course the reason why the Bank is having to take this new approach is because, as their report says, government policy has ‘weighed on output growth over the past three years and will continue to do so’.

And for balance so we have two right-wingers to balance out two quotes from Mr. Balls, this is Tony Abbott, August 2013 in response to the recent RBA rate cut:

“There is no doubt that a reduction in interest rates is a good thing, but you have to ask yourself why are interest rates likely to be cut,” opposition Leader Tony Abbott was quoted as saying by the ABC, ahead of the rate decision.

“If interest rates go down, it is because this government is presiding over an economy which is in much more trouble than government has previously been prepared to admit.”

I just like to document these things.  Perhaps a better title for this post would be “Politicians Shouldn’t Make Central Banks Independent of Political Control So They Can Still Take Credit for Monetary Policy.”

Categories: Monetary Policy

It’s Still Price Stability All the Way to Tokyo

August 8, 2013 1 comment

Left Outside has another great post explaining what was announced yesterday by the MPC in detail, and read his first here.

The simplest way to tell that there was no massive change in the BoE’s policy stance yesterday is to look at the forecasts.  The forecasts for inflation are basically unchanged since the May inflation report.

Bank of England Median CPI Forecasts

Bank of England Median CPI Forecasts

The Bank is still expecting to hit its 2% target at around the two year horizon, and then slightly undershoot from mid-2015 onwards.

Categories: Bank of England, Inflation

Nominal Recovery Does Not Happen “Naturally”

August 8, 2013 Leave a comment

I’ve seen quite a bit of discussion recently from various quarters about how a return to UK growth was inevitable regardless of what Osborne did with UK macro policy.

The benchmark here is Japan.  Japan did see a recovery in real GDP after 1991 as prices and wages adjusted to slower nominal GDP growth.  But they have never seen a recovery in nominal GDP – Japan’s nominal GDP in 2013 is lower than in 1991.  That is basically the critique Bernanke and others applied, to show that Japan’s macro policy was a failure; slow nominal wage growth, slow nominal GDP growth, slow or negative price inflation.

So I think it is still absolutely vital to distinguish between real and nominal GDP growth today in the UK.  What we saw in the July PMIs was one month of particularly good growth in a real indicator.  If the real indicators continue to indicate fast output growth and we continue to get moderate levels of price inflation I think that is a reasonable sign that we have a nominal GDP recovery.  Such a recovery does not happen “naturally”; it must be attributed to a change in macro policy.

(One note of caution here is that measures of output price inflation have been well below consumer price inflation, and the CPI is distorted by things like tuition fees, so it is hard to know exactly what is happening with the nominal economy.)

Market monetarists will point to the “long and variable leads” associated with an anticipated change in UK monetary policy since Carney’s speech on NGDPLT last December.  Evidence of a significant easing in monetary conditions since last year is the rise in inflation expectations, fall in Sterling, and rise in UK equity and other Sterling asset prices (yes, house prices too.)  It is also reasonable to say that changes in Japanese or US monetary policy have eased UK monetary conditions.

Fiscalists might want to offer a different explanation.  Did George Osborne end the “balance sheet recession” by goosing up the housing market, thereby providing a massive helicopter drop of net wealth to the credit-constrained private sector?  (I’ve seen estimates that Help 2 Buy will boost house prices by 30%.)  Somebody should make that argument, if so.  The path of UK private sector balance sheets is completely different to that seen in Japan since 1991, where nominal asset prices have collapsed by 50% or more over twenty plus years.

But either way I think it is important we must judge the success of macro policy in short-run stabilisation by looking at nominal outcomes not by concentrating on real indicators.

Reaction Roundup #2

August 8, 2013 1 comment

Left Outside has a very good post explaining exactly what was announced yesterday.

City A.M. have a trio of reports: Lars Christensen says the Bank falls short though it made a small step forward (I reluctantly agree), Allister Heath says it will backfire, and Andrew Sentance says we risk steep rises later.

Simon Nixon’s write up for the WSJ is on the whole very reasonable, but give up with the “housing bubble”!

Carney on TV: Faisal Islam has the C4 interview. with Ed Conway for Sky News, Richard Edgar for ITV, and Hugh Pym for the BBC.

Carney was on Radio 4 Today this morning, he said exactly the right things about Japan when Evan Davis asked him about low rates punishing “savers”.

Categories: Monetary Policy