Archive for October, 2014

This is what Haruhiko Kuroda Thinks About The “Liquidity Trap”

October 31, 2014 Leave a comment

Mike Bird has the details.

Categories: Japan, Monetary Policy

UK 2014 Q3 Nominal GVA, Early Estimate

October 24, 2014 2 comments

Eagle-eyed reader James noticed earlier this year that the ONS have started releasing a low-level breakdown of GDP which includes current price data even in the “Month 1” GDP data.  The official data in each quarter’s Month 1 estimate only has volume (real) measures of GDP, so previously we had to wait for the Month 2 estimate to get nominal GDP.  The low-level breakdown is for GVA so I’ll compare against the official series for nominal GVA:

Q/Q Growth at Annual Rates, %
Year Low-level
2013 Q1 3.6 4.8
2013 Q2 4.4 4.1
2013 Q3 4.8 6.9
2013 Q4 3.3 2.1
2014 Q1 3.7 3.7
2014 Q2 6.3 7.9
2014 Q3 3.9

The estimate suggests nominal demand growth has continued at a reasonable pace in Q3, adjusting for the “tyranny of low expectations” which allows me to believe 4% NGDP growth is “reasonable”.  Year-on-year growth comparing the low-level data with official nominal GVA:

UK Nominal GVA, Preliminary Estimate vs Official Data

UK Nominal GVA, Preliminary Estimate vs Official Data. Source: ONS 2014 Q3 M1, ABML

Thanks to James for finding this data source.

Categories: Data, UK GDP

Time to take the inflation target seriously

October 17, 2014 3 comments

It appears my timing could have been better in calling UK macro boring.

UK Market Inflation Expectations, FTSE 100, 2013-4

UK Market Inflation Expectations, FTSE 100, 2013-4. Source: Quandl, BoE

Those are not my ideal measures but the closest for which I have good data.  The 2.5 year implied RPI has fallen by 0.5% over the last thirty days, to 2.4% as of yesterday, implying a significant undershoot of the 2% CPI target over the Bank’s forecast period (2-3 years).  The FTSE 250 is at the lowest level for a year.

I caught a Newsnight discussion on the UK inflation data which was perfectly introduced by Duncan Weldon, who asked the right question: is the fall in inflation driven by the demand-side or supply-side?  The studio debate which followed was a little disjointed from the reality in which the UK CPI rate has been a consistently bad indicator of UK demand-side strength.  In fact it’s a contrary indicator, since periods of stronger real growth have been associated with weaker inflation and vice-versa.  George Magnus would have us believe that the inflation data is giving us textbook (“Economics 101”) evidence of a “chronic deficiency of aggregate demand”.  Chronic deficiency!?  If you ignore the fact that CPI inflation has averaged 2.9% over the last eight years, sure, Mr Magnus.

But I’d answer Duncan’s question like this.  If we see inflation running below the expected path and real GDP above the expected path, that looks like a positive supply-side shock.  If we see both falling short, that’s a negative demand-side shock.

Here for each quarter I take the Bank’s median forecast of the CPI rate and RGDP growth from the Inflation Report four quarters earlier, and compare with the outturn:

Deviation from Bank of England Year-Ago Median Forecast

Deviation from Bank of England Year-Ago Median Forecast. Source: BoE, ONS

The unexpected weakness of inflation and unexpected strength of real GDP growth does look like favourable supply-side news so far this year.  That’s a backward-looking analysis.

What matters now is policy today, which is forward-looking.  If the fall in UK inflation expectations is evidence of a positive supply-side shock then we should see a symmetric rise in UK real growth expectations.  So who has upgraded their forecast of UK growth over the last month?  The answer is… nobody has… and the fall in the equity markets (and gilt yields) makes it clear that growth prospects are falling too.

The Bank’s defence of inflation targeting as a policy regime, and their defence of the MPC’s decision-making under that policy regime, has always been consistent: what really matters is ensuring that inflation expectations are firmly anchored.

So… do it!  Carney and friends have been making hawkish noises in speech after speech through the summer, trying to prepare the ground for rate rises.  Does anybody seriously believe that there is even a single MPC member who believes the Bank is stuck in a “liquidity trap”, desperate for higher inflation but doesn’t know how to get there?  No: that is just a convenient fiction.

For the MPC, the facts have changed, and policy needs to aim at raising inflation expectations so they are consistent with the target.  Bravo to Andy Haldane for shifting in a dovish direction.  As for Martin Weale… what can you say.

UK 2014 Q2 Nominal GDP

October 16, 2014 4 comments

I’m a bit late with this.  With the ESA10 revisions integrated into the national accounts we finally got an estimate of nominal GDP for Q2 in the Quarterly National Accounts.  The usual data dump: quarter-on-quarter growth at annual rates (US-style):

Year Nominal
Deflator Real
2013 Q1 3.7 1.6 2.1
2013 Q2 4.6 1.6 2.7
2013 Q3 7.7 4.0 3.5
2013 Q4 2.6 0.4 2.5
2014 Q1 3.4 0.4 3.0
2014 Q2 8.1 4.4 3.8

ONS q/q NGDP growth rates continue to be annoyingly volatile.  For the longer view of growth I’ll compare with the OBR forecasts from Budget 2014, which also shows the contrast with the old data before ESA10 revisions:

UK Nominal GDP vs OBR Forecast

Revised UK Nominal GDP vs OBR Forecast. Source: OBR, ONS YBHA

2012 does not look quite as bad as it did before.  There are a number of things which are mysterious about the 2012 data – mainly the fact that real GDP goes nowhere as employment soars.  Really, that data is just weird.  If there was a betting market in UK GDP revisions I’d bet 2012 can get revised up further.  Fast forward to 2014 and we do see nominal GDP growth at slightly above 5% y/y.  That is a good place to be.

Real GDP growth also looks less bad.  The Bank have been expecting upward RGDP revisions for a while, it will be interesting to see in the Inflation Report whether this matches expectations.

UK Real GDP vs OBR Forecast

Revised UK Real GDP vs OBR Forecast. Source: OBR, ONS ABMI

Prior to the revisions it was harder to make the case that the breakdown of GDP-by-income was consistent with what was happening in the labour market – not impossible, but hard.  The updated series for total nominal wage and salary compensation is in fact more consistent with happened to employment (hours worked).  Four quarter moving averages, growth rates:

Wage and Salary Compensation vs Total Hours Worked

Wage and Salary Compensation vs Total Hours Worked. Source: ONS YBUS , RPCG

The gap between the lines is (roughly) wage inflation: there isn’t any.

Categories: Data, UK GDP