Today’s UK GDP figures provide a welcome ray of light after several quarters of unremitting gloom from the official statisticians. The underlying state of the economy is, of course, not as good as shown in the headline growth rate of 1 per cent in Q3 (4 per cent annualised compared with Q2). But previous quarters were wrong in the other direction, not least because of the infuriating tendency of the Office for National Statistics to understate GDP in its initial estimates for each period.
Stripping out the effects of the Jubilee Bank Holiday and the Olympics, the underlying growth rate in Q3 is probably about 0.2-0.3 per cent (0.8-1.2 per cent annualised). Kevin Daly at Goldman Sachs produces a UK activity indicator that has been growing at an annualised rate of about 1 per cent throughout 2012. This is scarcely an acceptable rate, considering how far real GDP fell during the recession in 2008/2009, but nor is it as bad as is often suggested.
The economy has not, in reality, fallen into a double dip recession this year. And because productivity growth has been so low, this low rate of GDP growth has been associated with a sharp pick-up in private sector employment. Unsatisfactory, but far from catastrophic, would seem to me the right verdict. Read more
As the IMF meetings close in Tokyo this weekend, it is obvious that governments are struggling to find the correct balance between controlling public debt, which now exceeds 110 per cent of GDP for the advanced economies, and boosting the rate of economic growth. The former objective requires more budgetary tightening, while the latter requires the opposite. Is there any way around this?
One radical option now being discussed is to cancel (or, in polite language, “restructure”) part of the government debt that has been acquired by the central banks as a consequence of quantitative easing (QE). After all, the government and the central bank are both firmly within the public sector, so a consolidated public sector balance sheet would net this debt out entirely. Read more
In recent years, UK Budget Day has become the occasion for an outbreak of hand-wringing from the economics profession. Downward revisions to GDP forecasts, and upward revisions to budget deficit projections, have become the norm. Those who have criticised the chancellor for tightening fiscal policy far too quickly have increasingly felt vindicated. Calls for a Plan B, involving less fiscal stringency in the immediate future, have become deafening.
Today may be rather different. For the first time in quite a while, there is no good reason for the Office for Budget Responsibility to downgrade its previous views on the economy. The underlying improvement in the budget deficit (adjusted for the absorption of the Royal Mail pension fund into the government accounts) will stay much the same as the OBR expected in November. If you believed it then, there is no new reason to doubt it now. That should allow the chancellor to focus on micro-economic issues, such as the tax treatment of higher earners, which will generate enormous political heat, but which will not alter the path for the economy very much in either direction.
The political and economic debate on fiscal policy has become increasingly polarised in many countries, and as a result seems to have reached a dead end. Some economists are so concerned about the present rapid rise in government debt that they favour immediate fiscal tightening. Others are so concerned about the risk of renewed recession, and are so unconcerned about the risks from extra public debt, that they demand immediate fiscal easing on a large scale.
In many economies, this debate has now reached a stand-off, in which governments are trying to reduce deficits and debt only very gradually, while hoping that a recovery in private expenditure will keep the economy out of recession. The result, which satisfies nobody, is very slow GDP growth and a continuing rise in public debt ratios. Read more
The Bank of England meets on Thursday with expectations running high that the MPC will announce a further large dose of quantitative easing. Even if they pass this month, which seems possible, this is likely to be only a temporary postponement. Whenever it comes, the next move will be another bout of “plain vanilla” QE, involving the purchase of £50-75bn of government bonds, and taking the overall Bank of England holdings to over one third of the total stock of gilts in issue.
Meanwhile, the Fed is still debating whether to increase its holdings of long dated securities, and if so whether to focus once again on government debt, or to re-open its purchases of mortgages. Any further QE would be contentious on the FOMC, but there is probably still a majority in favour.
Central bankers, unlike many others, have not lost faith in the efficacy of QE. The vast majority of them not only believe that additional asset purchases can further reduce long term bond yields at a time of zero short term interest rates, but also that this can increase real GDP growth, compared with what otherwise would have occurred. Are they right? Read more
Amid all the focus on the UK’s decision to use its veto, it is important not to miss the main economic outcome of the summit, which is that the agreement heralds a new era in European policymaking. The German approach to fiscal policy will now be writ large across the eurozone. This raises three key questions:
- How different will this prove to be in practice from the old status quo?
- Is it a good idea from an economic point of view?
- Does it allow the European Central Bank in future to play the same role in the eurozone as the Federal Reserve and the Bank of England have been playing in the US and the UK?
My initial take on the deal is that it will be sufficient to dampen the acute phase of the crisis, but that the absence of a clear long-term strategy for growth means that there could still be a long period of chronic problems ahead. Read more
An overseas friend asked me last week: “How is the guinea pig doing?” He meant the UK economy, which has embarked on an extreme version of the tight fiscal/easy monetary mix which all other developed economies are trying in varying doses. The answer I gave him was that Plan A was severely fraying around the edges, but that it just about remained intact.
That has become clearer with the decision by the Bank of England to re-launch QE in much larger size than anyone expected. While this is consistent with Plan A, there do seem to be differences between the Treasury and the Bank over the nature of the quantitative easing which the Bank is pursuing. These revolve around the question of whether unconventional QE should now be on the agenda. Read more
How much government debt is too much government debt? That question is pertinent in most economies today, but is especially pertinent in the US, where Congress is debating whether to raise the government debt ceiling, and if so on what terms. Unless economists can give sensible advice on the appropriate maximum level for public debt, much of the debate on budgetary policy is based on little more than political bias or, even worse, gut feeling dressed up as expert opinion. Read more
The Bank of England’s latest Inflation Report was certainly a downbeat document. Mervyn King, Bank governor, said there are “difficult times ahead”, because the economy is still undergoing a slow adjustment to the impact of the financial crisis. By reducing its GDP growth forecasts while simultaneously increasing its inflation projections, the Bank has signalled that it believes the UK is now facing a series of supply side problems – and those are always the most difficult for any central bank to handle. Read more