And other daft reasons the economy grew.

Chris Giles has a predictably thorough look at the state of the UK economy.  Asking whether the recovery is strong or fragile, he zeroes in on the key question; it “depends partly on why it grew so strongly in 2013 when even the most optimistic thought the UK economy would expand below its historic average pace.”

Let us remind ourselves what we thought at Budget 2013, and how much things have changed by Budget 2014.

Budget  title 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
2013 NGDP 1478 1526 1546 1595 1658 1728 1806 1889 1976 2067
2014 NGDP 1478 1526 1571 1644 1721 1788 1871 1956 2042 2132

For the current year, we are trying to explain £63bn of extra NGDP.  This is an extra £1000 of spending for every man, woman and child in the UK. It is a lot to explain!

Pointing this out makes obvious how weak some of the typical explanations offered must be.  Weale’s “It must have been confidence” is a classic non-explanation: confidence as that residual term that explains everything not hitherto predicted.  Why were they confident?  Did we just need to sit weakly waiting for confidence to return? One Coalition narrative is that “Confidence” is crucially linked to faith in the fiscal plans.  But that sits uneasily with the way this chart fell downwards in autumn 2010 (source: GFK, Savills):

ConsConfidence

What I really dislike about a general reliance on “confidence” is how powerless or tautological it leaves the macro policy making process.  I had to listen, silently cringing, as really rather important people who should know better intoned around polished tables about how a well run Olympics would give Britain a Boost, and everyone would rally round.  Forget the Confidence Fairy, here was its juiced up quadrennial cousin, the Olympic Confidence Fairy, arrived just in time to work with a team of Underpants Gnomes to cheer us on.

Chris Giles is right to dismiss another explanation entirely: there was no direct fiscal spending boost.   The fact that tax revenues fell short in 2012-13 doesn’t constitute a stimulus. If anything, between 2013 and 2014 forward fiscal policy tightened, suddenly promising unjustifiable surpluses.

Another unconvincing explanation is a big state-ordained credit boost.  Funding For Lending got going in late 2012. It looks like at most it could provide £40bn of funding at a time when outstanding Lending to Individuals is about £1.4trn.  Anecdotally, I heard some of the banks involved really didn’t need or want the money, so FLS is unlikely to have been entirely additional.   At the beginning it mostly went to mortgages. Can the cost of credit explain much?

Mortgage and savers rates

Not really. What new mortgagees gain, other savers lose.   It may well be a wash; it certainly isn’t £60bn. Equity withdrawal is still negative. Other areas of typical interest, like outstanding SME lending, are still falling.  Finally, awkwardly for HMT: credit policy is much closer to fiscal policy than to monetary policy. It isn’t “monetary activism” to lend to people on terms the market doesn’t support; it is functionally equivalent to borrowing to set up a fund to backstop bank losses.

And finally finally, if the secret to stimulus is ever lower rates, this is awkward:

Gilt Yield 2010-14

On the way down, those lower rates were a sign of international confidence (despite the Pound not soaring, strangely). On the way up, it is a further sign of confidence. Confidence abounds, always.

Other helpful factors are easier to identify.  Oil prices are lower than expected a year ago, by £5 a barrel. The Euro Crisis has abated. It must have helped to have lost that tail risk and the impaired financial system.  Perhaps Draghi’s promise to do “whatever it takes” helped a bit. But Euro Area GDP is about as strong as expected in Budget 2013, and exports are even weaker than expected back then.

Other aspects of the economy can be found as part of a recovery narrative such as the much higher house prices, and higher numbers of housing transactions – some 20% more than expected the year before. But, as I’ve said before, how much this is a cause and how much a consequence of much higher NGDP growth is really moot.

So what are we left with? I would say: monetary policy.  But I appreciate it sounds as circular as many of the explanations I have mocked.  Monetary policy was working, because NGDP grew at over 4.5%.  How did it work? Clearly not through lower rates.  All I can say with the space I have here is that a new governor came in, made a series of extremely doveish statements, including flirting with NGDP targeting, and made it abundantly clear that he would keep conditions loose come what may.  The contrast with the behaviour of the MPC in 2011-12 is impressive.  Back then, confronted with a supply shock that damaged real monetary conditions several of them lined up to worry publicly about inflation, and call for higher rates quite soon.

The view that better monetary policy management is a big reason for our unexpected expansion clearly needs far more defence than this.  But put it this way.  We have £60bn a year to explain.  It wasn’t the stingy government.  It wasn’t cheering like crazy near Greenwich.  What else is that powerful?

 

 

 

 

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8 thoughts on ““We’ve won the long jump, so let’s buy a fridge”

  1. it could be that everybody knows government deficit was to high so even modest reductions showed competence however silly their Luddite policies.
    It could be that human physiology is just incapable of sustaining depression for so many years so that stuff which once depressed us (zero or less real income growth) eventually becomes normal.
    It could be that seeing the rest of the world growing at an average of 5%, people think our idiots can’t keep screwing up forever.

  2. Isn’t this though ‘The Bank of England governor has made a pledge to keep rates low until unemployment falls a very modest amount so let’s buy a fridge”? I know you make this point. I do think Carney must have helped but I’m really not sure it can have been a big part because his policy was so modest and distant to most people. I haven’t looked at the timings in detail but I still think H2B, foreign buying and the house price surge (haven’t most new jobs been created in London and nearby?) must have played an important role – the house is up £10k so I will buy a fridge is something I did last year.

  3. I think Chris Giles observed that household consumption had started to rise in 2012, long before there could have been much housing wealth effect. And a very small% of people are ever out there buying a house and being affected by the financial conditions around doing so.

    Around then, certain exogenous headwinds stopped blowing – Euro credit spreads, oil prices.

    AM kicking myself for not mentioning PPI cash payments as a possible driver though, particularly in the light of today’s Smaug post

  4. Forward Guidance was brought in to loosen monetary policy further after QE, but the point is why does NGDP matter? It’s real growth that matters, not nominal growth, and in fact nominal growth without real growth just hurts people on fixed incomes and other people who have to spend time changing prices.

    Regards

    1. Hi Eddie

      There are plenty of times when more NGDP is a bad thing. The 1970s, for example. Zimbabwe not long ago.

      It depends on what you assume about the shape of the economy right now. My assumption is that there are substantial unused resources – the AS curve is sloped, not vertical – and so more NGDP means more RGDP. The past year has suggested as much. 4.3% or so NGDP has broken down into 2.8% real, 1.5% inflation. Roughly.

      The other reason to care about NGDP is that it reflects nominal spending, which is what the combined fiscal-monetary authorities in the UK have better chances of influencing

      G

      1. Hi Giles, thanks for the reply. I don’t understand the technical side of economics enough to talk about slack in the economy, I just wanted to defend against what I feel has become a bit of a disregard for monetary discipline.

        Regards

      2. I guess my point is that one cannot talk separately of inflation and growth. Anything to stimulate the economy plays into spending, which affects both. THe key question is what proportion of each that you get. I personally am a dove; I don’t think we have a big risk of losing the integrity of the currency. Or at least there are greater risks right now!

      3. I understand. My opinion on the matter is that inflation is actually quite high already, but it’s not really recorded because house and stock prices aren’t in the CPI (RPI has its errors too). Savers at the moment seem to be protected by a rising stock-market, but to me it doesn’t seem sustainable – low interest rates should be hurting savers.

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