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.
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):
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?
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:
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?