A blow-out 60.2 on the July Services PMI cements the case for a UK recovery, but I still can’t agree with Tyler Cowen that we should be somehow content with the current rates of AD growth. Maybe Cowen’s point is merely that the UK no longer has a “problem” with very tight AD policy, but there is a world of difference between perma-recession and optimal policy.
Let’s at least get the facts right:
1) Unemployment is not falling. Employment has been rising fast enough to keep the unemployment rate roughly stable. Most forecasters are expecting the unemployment rate to stay at around 8% for this year and next.
2) The 4.2% PPI inflation figure Cowen quotes is producer input prices; the far more interesting figure is producer output price inflation, which is running at around 1-2%.
The UK has a history of deep recessions from which we never attempt to “make up” lost growth, accepting a new lower trend path of RGDP, and generally a very slow recovery in employment. Are these demand-side policy errors, or inevitably slow supply-side adjustments? I don’t know for sure, probably some of both.
In my view monetary policy should be aimed at providing around 8% nominal GDP growth for the next two years, returning to the NGDP trend started in mid-2009, and then sticking to a c.5% level path. This would hold the CPI rate up at 3-5% for the next two years. It would involve a “boom”, there will be “bubbles”, there will be… hold your breath… increases in debt!
For all those reasons I don’t expect the MPC to aim for 8% NGDP growth. I hope we will get at least 5% NGDP growth, and that will be better than the 2-3% growth we see currently. But I hate the idea that we should resign ourselves to a recovery which is constrained by the politics of a high CPI rate, that we should live in fear of “bubbles”, or that we should accept rule by policymakers who think they can tell the difference between “sustainable” and “unsustainable” growth.