Nominal Recovery Does Not Happen “Naturally”
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.