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Taking Stock

Here’s a quick look at what has happened to the UK data over the summer.

1) Forward-looking indicators: Inflation expectations have been stable and remained relatively high over recent months.  This is good news, particularly given the rise in Sterling we’ve seen.  3% expected RPI is roughly consistent with 2% expected CPI.  (As usual the non-reform of the RPI methodology is an annoying distortion.)

UK RPI Inflation Expectations and Sterling ERI

UK Implied RPI and Sterling ERI.  Source: BoE Sterling Broad ERI, Implied RPI

2) Indicators of current real activity were strong for July and even better for August, with the aggregate PMI hitting an all-time high.  This leaves a little egg on the faces of the supply-side pessimists, in my view; arguments that we should have been raising interest rates because low real growth was the “new normal” are starting to look a bit silly.  But that argument can always turn into one about “unsustainable growth” and bubbles, and will no doubt continue.

ECFin Economic Sentiment versus Real GDP

ECFin Economic Sentiment versus Real GDP. Source: Eurostat ei_bssi_mr_2 , ABMI

3) Labour market.  Official data has only caught up to the May-July period; optimism there in that employment and total hours worked continue to hit record high levels, the latter rising 2.5% year-on-year.  On the other hand the optimism, the claimant count and unemployment rate are falling, but only very slowly.  August survey data looks very strong for the labour market too.

4) The really interesting question: is there a demand-side explanation for a real recovery?  There could be two sources for a real recovery:

a) An adjustment to very slow nominal growth.  Two pieces of supporting evidence here: firstly that nominal hourly wage growth has been pushed down to very low rates.  Secondly that the GVA deflator in Q2 suggested that whole-economy price inflation was negative q/q to Q2.  But neither of these data points are conclusive.  The wage data has been distorted by timing of bonuses against the higher rate tax cut.  And the deflator is particularly unreliable in early estimates.  Here’s the graph of the Eurostat nominal hourly wage data and the ONS estimates, anyway:

Estimates of UK Nominal Hourly Wage Growth

Estimates of UK Nominal Hourly Wage Growth. Source: ONS Table EARN08, Eurostat lc_lci_r2_q

b) An alternative explanation is a recovery in nominal demand growth.  Two main pieces of evidence again here: the rise in equities, the FTSE 250 is up 30% year on year; and the rise in inflation expectations mentioned earlier.  The fact that real activity has apparently turned so sharply around does in itself suggest a demand-side change.

The Q3 nominal GDP data will be of particular interest.

Categories: Data, UK GDP
  1. September 13, 2013 at 13:56

    I think a demand side story along the lines of supposing that the Wicksellian natural interest rate has just hit zero are pretty compelling. Its kind of assumed in all economics that an economy has some tendency to return to equilibrium. With the natural rate below zero due to low AD expectations, policy was essentially contractionary, dragging on this natural tendency. However, despite that, the mean reversion tendency has won out after five years, at least enough to turn the natural rate slightly positive, which has changed policy from a drag to a boost. This will now spur rising demand, which will raise the natural rate even further, making the policy of holding the natural rate at zero more and more stimulative in a nice positive feedback.

    I felt for Carney in the TSC, trying to explain that forward guidance is expansionary if the natural rate was above zero and contractionary if its below zero and that its hard at any given time to understand what the natural rate is doing is obviously too hard for the TSC.

    Perhaps he should just have tried to explain that like any given interest rate, it can be either stimulative or contractionary depending on the state of the economy, and the zero rate is no different.

    • September 13, 2013 at 15:24

      Great comment. I hope you are right about the positive feedback.

      I have no sympathy at all for Keynesians failing to explain monetary policy purely in terms of interest rates though!

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