Archive for the ‘UK GDP’ Category

Headlines You Won’t Read Today: “GDP Growth Driven by Expectation of GDP Growth”

November 28, 2013 Leave a comment

There are few things I hate more than reading headlines saying “GDP growth driven by X” – especially where X is usually something deemed “bad” like “consumer spending”, or “household debt”, or “rising house prices”.  There is much fallacious thinking packed into these headlines, and it usually plays out in the articles.  “Rising spending leads to rising incomes”, “rising incomes lead to rising spending”, “rising employment leads to rising demand”, “consumers can’t spend more with real wages falling”, and so on, and so on.

All these phrases want to take the macro out of macro; incomes rise then spending rises, or vice versa.  In aggregate, spending and incomes are always equal by definition at every point in time because “spending” and “income” are just two different ways to record the exchange of goods and services for money.

What really “causes” rising aggregate spending (income)?  Well, of course, the expectation that aggregate spending (income) will rise.  Expectations above all else… house rules.

Anyway, my point is, Larry Elliot is very confused:

Fears that Britain’s consumer-led recovery is losing momentum are increasing amid signs that the rising cost of living is hitting confidence and high-street spending.

There is no more a “consumer-led recovery” than there is an “household income-led recovery”.  Expectations of income (spending) went up and hence income (spending) went up.  Forget about the grossly deceptive partitioning.  And do you think the falling cost of living is raising confidence in Spain or Greece, Larry?   Maybe UK macro policy is just not tight enough for the Guardian econ editor, who is still addicted to the opium marketed as “price stability”?

So here is some “cheerleader for growth blogging” as a counterpoint to media doom and gloom: the EC’s Economic Sentiment Indicator update for November was published today, and it is says UK “confidence” is up slightly on October and still up in “boom” territory.

ECFIN Economic Sentiment Indicator vs Real GDP

ECFIN UK Economic Sentiment Indicator vs UK Real GDP. Source: ECFIN, ABMI

Categories: UK GDP

UK 2013 Q3 Nominal GDP

November 27, 2013 1 comment

The Q3 nominal GDP figures are out.  I cannot be too unhappy with NGDP growing at nearly a 7% quarterly rate.  If this rate of nominal growth can continue consistently for a couple of years that is close enough to what I’d hoped we’d see.

Here is the quarterly growth profile, at seasonally adjusted annual rates:

Year Nominal
Deflator Real
2012 Q4 2.3 3.9 -1.2
2013 Q1 4.6 2.7 1.5
2013 Q2 1.6 -0.8 2.7
2013 Q3 6.9 3.5 3.2

On the annual view, I’ve used GVA not GDP to factor out the VAT changes as usual; real and nominal GVA continue to move in lock step, with the GVA deflator still stuck around 1-2% since the beginning of 2010:

UK Gross Value Added

UK Gross Value Added. Source: ONS ABML , CGBV , ABMM

And for the all-important fiscal arithmetic, for a change nominal GDP is growing faster than OBR forecasts, hence debt/GDP and deficit/GDP should come in a little better than expected.

UK Nominal GDP versus OBR Forecast

UK Nominal GDP versus OBR Forecast. Source: ONS, OBR

Categories: Data, UK GDP

UK Productivity and Demand

November 7, 2013 6 comments

There’s been some discussion of UK productivity recently, Simon Wren-Lewis here, Martin Wolf here, and Scott Sumner indirectly too.  What I find interesting is that UK productivity exhibits such a strong positive correlation with nominal demand growth.  I’ve graphed here the growth rates of nominal GVA, and market sector output per hour.

UK Productivity and Demand

UK Productivity and Demand. Source: ONS GYY7 , ABML

Why do we see that procyclical movement of productivity?  I’ll offer three views:

1.  Firstly, this is simply what we should expect to see under an inflation-targeting central bank.  The inflation-targeting CB is trying to control the gap between (growth of) aggregate demand and aggregate supply.  When we have a negative productivity shock (2008, 2012) the CB must drive down nominal demand growth to prevent high inflation.  That’s all this data shows; Mervyn King and the supply-side pessimists will settle for something like this view.  There is no AD problem per se, it’s supply, supply, supply.

That story is muddied only a little by the difference between CPI inflation (the actual BoE target) and output price/GVA inflation.  GVA inflation, averaging 1.8% over the last four years, has been stabilised by the BoE arguably more effectively than the headline CPI.

2.  Another view is that the GDP data is wrong, at least post-2009.  The 2012 productivity collapse is genuinely weird.  The fall in market sector output/hour masks the fact that hours worked soared upward, up 2.6% over the four quarters to 2012 Q4, while market sector output contracted by -0.3% over the same period.  (The GDP data still show a market sector “double-dip” in 2012, offset by the positive contribution from the savage fiscal austerity rise in the volume measure of government consumption).  There are a few theories here:

a) The idea that the GDP data is wrong is neatly supported by work on measuring intangible investment (see Goodridge, Haskel et al).  I find this quite compelling because it matches an anecdotal view of what is happening in some sectors, e.g. retail.  With the shift towards on-line shopping; that sector is investing in intangible assets (web sites, software etc), and there is less demand for new tangible capital (shops).

b) Markit’s Chris Williamson made the argument recently that the official labour market data which is wrong.  The ONS disagreed, needless to say.  Given that the change in unemployment has roughly tracked the movement in the claimant count, I’m not sure how much weight to put on this idea.

c) The nominal GDP data is right, but the inflation data, and hence output and output/hour, is wrong.  A pet theory of this inflation-sceptic blogger.  Under five years of 1920s-style NGDP growth we have seen widespread discounting and substitution.  For the latter, think about the success of UK budget hotels, airlines, and supermarkets; this is substitution between goods/services of different quality.  I strongly suspect such changes are near-impossible for the ONS to capture “correctly” in the price indices, and hence measured inflation is far too high.  This makes measured productivity appear to be more procyclical than it should be if we “correctly” measured inflation and output.

3) A third view… it’s demand, demand, demand.  The slow growth of NGDP was simply a mistake, it was bad macro policy.  Labour hoarding and hand-waving are used to explain away the productivity data.  The correlation in the graph really is a causal relation, but it goes from demand to productivity; we’ll see a recovery in productivity with a recovery in AD.  So jump to it Mr. Carney/Mr. Osborne.

In optimistic moments I can subscribe mostly to (3), and 2013’s apparent recovery in output along with a recovery in demand supports that argument, in my view.  Martin Wolf argues the Bank can “correct… highly visible errors” on inflation later on, after “gambling on growth”.  But what is a “highly visible error” if not the last five years of UK inflation?

Supply-side optimists cannot sit on the fence and pretend the 2008-201X CPI trainwreck never happened.  It’s surely more convincing to argue we should take productivity – and inflation – out of macro policy altogether.  Set a stable path for nominal incomes and let the supply-side puzzle itself out.

Taking Stock

September 13, 2013 2 comments

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

UK 2013 Q2 Nominal GDP

August 23, 2013 10 comments

The nominal GDP numbers are out for Q2 and are weak, the impressive thing is the negative GDP deflator for the quarter – yes that’s deflation.  As usual the q/q rates are highly unreliable in this first estimate, so should be taken with a large pinch of salt.

The annual rate has improved but this mostly reflects the 2012 Q2 quarter falling out.

Last four quarters at seasonally adjusted annual rates:

Year Nominal
Deflator Real
2012 Q3 4.7 1.6 3.0
2012 Q4 3.2 4.3 -0.9
2013 Q1 3.8 2.7 1.1
2013 Q2 1.7 -1.1 2.9

And here’s the graph using nominal GVA, to avoid the VAT distortions across 2008-11:



Categories: Data, UK GDP

Headlines You Won’t Read Today: “Central Bank Misses Forecasts By Slightly Less Than Usual”

July 25, 2013 3 comments

Outturns, plus Bank of England forecasts in May 2012 for inflation and real GDP growth over the four quarters to 2013 Q2:

Forecast  2.3% 2.5%
Outturn  2.7%  1.4%
Error  +0.4% -0.9%


Categories: UK GDP

On the UK Labour Market “Mystery”

July 25, 2013 1 comment

I’m genuinely confused by Simon Wren-Lewis’ post on “Behaving Like Luddites” and wanted to offer a decent response.  A reasonable but condensed version of Simon’s argument, is, I hope:

Bad demand-side policy has caused UK output to stagnate.  Due to a supply-side problem of falling productivity, employment has risen strongly – but this is not something we should celebrate.

I have a few problems with this:

1) I could apply exactly the same logic to the early 1980s, and I don’t think Simon would endorse that view.  i.e. “In the initial recovery from the 1979-81 recession, real GDP grew fast.  It’s true that unemployment carried on rising until 1984, but this was due to a huge rise in productivity, not bad demand-side policy.”  That argument seems completely consistent with using “changes in productivity” as an “excuse” for the employment data post 2010.  (Yes, this comparison is over-simplified.)

2) Is it not fair to distinguish demand-side shocks which impact employment from other shocks which impact output – and isn’t it fair to consider exactly what shocks are hitting the UK?  Supply shocks such as the 1973 oil shock did not impact employment; the lowest recorded point on the ONS series for the unemployment rate is in late 1973 when the UK had been in recession for two quarters.  That was a supply-side recession with low output and very high inflation.

3) If you look at the breakdown of GDP by income in the national accounts, it is not quite so obvious that rising employment is really a “mystery”.  Here’s one view:

Year Per
2009 -1.7 0.9 -2.9 -1.6
2010 1.2 2.6 0.5 0.2
2011 1.4 1.4 0.4 0.5
2012 1.7 0.4 2.0 1.2

% Annual growth.  Source: ONS.

This is derived from Scott Sumner’s “musical chairs” model as in earlier posts, and I am merely ripping off Scott’s many posts on this subject as usual in this post.  What is surprising in the above table is that since 2010, even on a per capita basis, we’ve see a rising growth rate of “labour income” – defined as total wage income for employees plus mixed income, albeit still at low rates.  It seems possible based on that data to claim that:

a) flexible nominal hourly wages plus rising nominal incomes is a sufficient demand-side explanation for rising employment and actual hours worked,

b) hence, the stagnation of output, and particularly output per hour worked, is at least partly the real mystery with the UK macro data (pun intended)

For many countries in the Eurozone I’m sure you could make the claim that fiscal austerity has caused people to do less work, and find confirmation in the macro data.  At least for 2012 in the UK, you’d have to claim that fiscal austerity has caused people to do much more work producing the same amount of stuff.  That sounds like a supply-side effect, not demand-side.

My bias is that there’s probably a measurement problem with the price indices, i.e. the NGDP figures are roughly right but we are getting the real/inflation split badly wrong.  I see deflationary trends wherever I look.  But the supply-side pessimists have an argument which must be attacked analytically rather than idly dismissed.

This was a rambling post already, but, lastly, 2012 was a weird year if you believe all the current data.  Hours worked soared; the last time hours worked rose that fast on an annual basis was during the Lawson boom.  Yet in 2012 output rose only 0.2% rather than the 4-5% seen under Lawson.  That’s just really, really strange; dismissing such evidence because “Luddism is bad” seems much too hasty.

Categories: Inflation, UK GDP, Wages