The ONS published the first nominal GDP figure for 2013 Q4 this week, and so we have calendar 2013 too. Quarterly nominal growth rates continue to be erratic with revisions appearing to move nominal growth around between quarters; so I think we should not to put too much emphasis on the quarterly growth rates. However, the good news is that NGDP growth has picked up to 4.5% over the year to Q4, from a sub-2% low in the second half of 2012.
Here are the annual growth rates for the last six years, nominal, real and deflator growth, with nominal GVA at basic prices (and deflator) included to show the distortions from indirect tax changes:
This graph shows year-on-year quarterly growth:
Contrary indicators do remain for the “strong nominal growth revival” thesis: growth of nominal imports is fairly slow (2.4% ex oil over 12 months to Q4), as is growth of income tax receipts (OBR says 3.2% ex special factors), and the labour market slowed a little in December, though the LFS monthly sampling effects may distort this.
On that last point, Ben Chu tweeted a good chart showing how unemployment has changed for each of the three cohorts surveyed; the headline unemployment rate being a rolling 3m average. The fall in the headline rate is driven by two of the cohorts seeing a 0.6% and 0.7% fall in unemployment over just three months to October and November respectively. Which seems almost too good to be true. The collapse in the claimant count is perhaps the most convincing reason to believe that the labour market really is doing so well.
Looking forward, the ECFIN ESI confidence indicator rose in February to its highest level since 1989. Should we call it the Carney boom… or the Osborne boom? You decide. But where is that 4%+ output growth?
For me one of the most important lessons for British economic policymakers over the last six years should be to fear the interaction of micro with macro, supply-side policies with demand-side policies.
I do not think it is a merely a co-incidence that the worst fall in nominal demand since the 1920s occurred at the same time as a supply-side shock (collapse) in 2008. All recessions in British history have been driven by tight money aimed at lowering inflation. Was this time different? It’s not obvious why… CPI rate, September 2008? 5.2%.
And I do not think it is merely a co-incidence that the worst recovery in demand on record has occurred at the same time as inflation has sometimes hovered, sometimes soared above the inflation target. CPI rate, September 2011? This is during the time when the Darling/Osborne austerity drive “sucked demand out of the economy.” That CPI rate in September 2011 was, again, 5.2%.
Here is MPC hawk Martin Weale writing this week:
If wage growth picks up more rapidly than I expect, it will be an indication of inflationary pressure in the economy and Bank rate will need to rise sooner. If wage growth remains subdued, Bank rate should rise more slowly. Because the future is uncertain, we cannot make any promises about where Bank rate will be in a year or two years.
Raising the minimum wage by 3% at a time when hourly wage inflation is 1-2% at best, and is one of the indicators preventing the Bank from screwing up the demand side again… that would surely be an incredibly foolish gamble.
What, exactly, have policymakers learnt from six years of negative supply shocks and disastrous demand-side outcomes? Have we even learnt anything about wages, nominal shocks and employment? It does not appear so.
So sure, let’s try another supply shock. Maybe we’ll get “lucky” and the labour market tightens enough this year that hourly wages pick up, so that a 3% NMW raise doesn’t hurt many more people. Maybe.
Here is the Low Employment Commission report for 2008 (before the recession):
3.18 The decline in the labour market position of young people has been general across the UK. The proportion of young people not in FTE aged 16–21 who were in employment fell in almost all regions between 1998 and 2007, unlike those aged 22 and over who saw their employment share increase in all areas of the UK except London. However, by European standards, young people’s labour market position in the UK is relatively strong.
Good one! Our labour market may be doing badly, but just look at Spain! Those guys are really screwed. They continue:
Given that employment in the UK has been at record levels, it is difficult to explain why young people have not done better in the labour market. Two significant developments in the labour market in recent years have been the increase in the number of people of pension age becoming economically active and the arrival of predominantly young migrant workers from the European Union accession countries.
It’s “difficult to explain”… right. A total mystery. I can’t think what might have caused it, so let’s blame immigrants and old people, those are surely the most “significant developments” in the British labour market in the years to 2008. If anybody does have any better ideas about what happened, be sure to write to Card, Krueger, Dube, etc.
In the UK the spotlight is usually on the weekly wage measure produced by the ONS, Average Weekly Earnings. Scott Sumner tells us to focus on hourly wages. Why? I think the heart of the theory is that the hourly wage is a stickier price. Weekly wages can adjust via a change in hours, or the hourly wage rate.
In this post I’ll take a look at the hourly wage data. The ONS do not produce an “official” time series for mean hourly wages; but we can get to the data by a number of different routes:
- The Annual Survey of Hours and Earnings. This survey should provide the most reliable data for employed workers, and provides the gross mean hourly earnings (amongst others) from a survey of employers.
- The Labour Force Survey. Every quarter the Labour Market Statistics provide an update to a measure of mean gross hourly earnings (table “EARN08”) from the LFS. This data is known to underestimate the mean, it excludes workers earnings more than £100/hour.
- The monthly labour market update provides both an estimate of Average Weekly Earnings plus average weekly hours, again from the LFS. A simple matter of division should give us the mean hourly wage.
- The national accounts, combined with the Labour Force Survey. The national accounts tell us aggregate national wage income. The LFS data tells us total hours worked. From these two we can calculate mean hourly wages. I don’t know of any reason to doubt the LFS hours data. The national accounts do of course get revised. I am not sure how reliable this measure should be.
The ONS does also have an experimental Index of Labour Cost per Hour series. This data is also available from Eurostat as the Labour Cost Index. Annoyingly we are not given the underlying nominal data in either case, only the index level; I will ignore those series for this post.
This is what the four different sources of hourly wages look like:
I was pleasantly surprised that these estimates came out relatively close together; the data from the “EARN08” table (green line) is as expected an outlier.
Comparing weekly with hourly wages it does appear that a reduction in weekly hours worked in 2009 contributed to the weakness of weekly wages. Here I’ll stick with the LFS data using average weekly wages/hours as the hourly wage:
Similarly the recovery in average weekly hours since 2011 explains why weekly earnings have grown faster than hourly wages.
On the ASHE measure the average annual growth rate of gross hourly wages was 4.1% between 1997 and 2007, falling to 1.5% between 2008 and 2013. Remember that 4.1% figure when you are told silly stories about how globalisation reduced wages in Britain, and remember the 1.5% figure when you are told that inflation is the “real threat”.
It is – or should be – astonishing that unelected technocrats get away with this madness without being immediately ejected from office. From the Riksbank’s latest:
In the forecast, CPIF inflation reaches 2 per cent in 2015. An even more expansionary monetary policy could lead to inflation attaining the target somewhat sooner. But a lower repo rate could also lead to resource utilisation being higher than normal in the long run and to the risks linked to household debt increasing further. The current repo-rate path is expected to stimulate economic developments and contribute to inflation rising towards 2 per cent, at the same time as taking into account the risks linked to household indebtedness.
Low inflation, low output, low employment – it’s simply a policy choice. They know it is a policy choice. They think low inflation, output and employment are the right policy choice, because rising household debt leads to, well, um, maybe low inflation, output and employment.
Via Mr. Svensson, still methodically attacking the madness.
This data is slightly better than was expected, output/hour rose in absolute terms.
I’m still trying to stay intensely relaxed about the falling UK CPI rate. There is more than enough media coverage on that 1.9% number. What has not been so widely advertised is that the ECFIN Economic Sentiment Indicator rose in January to the highest level since 1997. The lesson of the last five years is that the CPI rate is not a good proxy for aggregate demand. Let’s not forget it!
For what it is worth, the Bank of England think monetary policy is a little too tight to hit their 2% inflation target on the two year horizon, where the median forecast is now 1.9%. And that is the way we should judge the stance of monetary policy under inflation forecast-targeting.