Chris Giles

Understanding the significance of George Osborne’s Autumn Statement is complicated by political posturing. These eight charts will enable you to cut through the spin and surprise people with knowledge of what really matters.

1. Forget the announcements Read more

Chris Giles

Real business investment grew 1.4 per cent in the third quarter, prompting many City economists such as Howard Archer of IHS Global Insight to welcome the fact that “business investment is finally kicking in”. If so, that is hugely important to the UK economic debate. Investment growth will enable the recovery to rebalance away from squeezed households who cannot easily borrow more and more to support spending for a lot longer, exporters whose prospects depend to a large extent on the still-troubled eurozone, and the government which will continue its austerity drive.

The following five charts about business investment should make you pause for thought and raise quite a few questions about data reliability as highlighted by the Bank of England governor on Tuesday.

Investment in buildings, plant and machinery did not drive Q3 growth

Far from investment being important to the 0.8 per cent real growth and 1.7 per cent nominal growth in the third quarter, this chart shows that the good growth figures were almost entirely generated by household consumption and a build-up of unsold stocks within companies. Investment contributed only 0.1 percentage points to the 0.8 per cent growth. Read more

Chris Giles

The Bank of England is a powerful organisation, which rarely hears criticism from insiders or outsiders because economists are quite polite people.

A leading economist I respect sent me these views on the communication of forward guidance, but did not want to be identified. I thought they deserved an airing. So in the style of the secret footballer, here the “secret economist” compares what senior BoE officials say about guidance with what they mean.

What we say … and what we mean

This is the right policy for a recovery … Please forget all that stuff about guidance is the right policy for an economy that is flat-lining.

We have made policy more effective …We can’t explain how. This statement sounds like code for a change in the stance of policy, but we don’t want to re-open that can of worms.

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Chris Giles

I’ve written quite a bit about the effectiveness of the Bank of England’s forward guidance on monetary policy. One reason is that the BoE has been willing to say guidance “makes the exceptionally stimulative monetary stance more effective”, but not by how much. Indeed, the governor and other officials have always — and sometimes embarrassingly –dodged questions about whether the BoE thinks guidance imparts stimulus at all.

There is no easy answer to the question of how much stimulus has forward guidance imparted. That said, I think I have found a reasonable method for reverse engineering the answer to a different question: what effect did the Monetary Policy Committee believe could be attributable to forward guidance? Read more

Chris Giles

At Wednesday’s Bank of England inflation report, the Monetary Policy Committee took a look at its August economic forecasts and said “what bunch of extreme pessimists produced these?” No one needs to answer that question.

The MPC then revised its growth forecast sharply higher with the consequence that unemployment was expected to fall much quicker, hitting 7 per cent 18 months earlier than it thought in August. But the best news for people in Britain was that in the November forecasts imply the people in charge of interest rates think inflationary pressures are weaker than in August, so more rapid growth and lower unemployment comes without the cost of higher inflation.

In times past, such an inflation report would have been seen as dovish. Even with stronger growth expected, the inflation forecast was revised down so there was less need to tighten monetary policy. Everyone would have understood the meaning. Read more

Chris Giles

The Office for National Statistics has just published October 2013 inflation figures. These show the consumer price inflation rate falling from 2.7 per cent in September to 2.2 per cent last month, a much greater fall than the average of economists’ expectations of a drop to 2.5 per cent. The discredited retail price index, which is still used to uprate index-linked government bonds, rail fares and other utility bills fell from 3.2 per cent in September to 2.6 per cent. The essential news and context comes in the following five charts.

1. Inflation falling faster than Bank of England expected Read more

Chris Giles

The well-worn chart below is often taken to show chronic lack of effective demand in the economy. It shows the level of gross domestic product (in red) alongside a trend line from 1997 to 2008 (in blue). Output is now 18 per cent below the previous trend and this purports to signal the failure of the British authorities to stimulate the economy sufficiently over the past five years.

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Chris Giles

Industrial production and manufacturing figures for September were published by the Office for National Statistics this morning. They showed manufacturing picked up in September a little more than the statisticians had expected when they estimated third quarter economic growth, but not enough to trigger a revision to the 0.8 per cent initial growth estimate. The following five charts add some detail and put the figures in context.

1. Manufacturing still has a long way to recover Read more

Chris Giles

This morning the Bank of England published its monthly Bankstats. These are a treasure trove of information with the headline data showing mortgage approvals at their highest rate since 2008. But the BoE release contains much more information than that, which is summarised in the following four charts. These are better than the charts the BoE publish in their press releases as they show a much longer time series and attempt to put the figures into context.

1. Mortgage approvals Read more

Chris Giles

The Office for National Statistics reported today that the economy grew 0.8 per cent in the third quarter of the year. Here are six charts which explain the importance of the data

1. Growth is back at normal levels Read more

Chris Giles

Mark Carney, the Governor of the Bank of England, announced a dramatic easing of the central bank’s attitude towards financial companies with temporary funding difficulties, he buried the policies of Lord King, his predecessor, and adopting a stance much more similar to the Federal Reserve and European Central Bank.


Reaction from our economics team:

It might appear unsurprising that a global citizen such as Mark Carney tonight proved such a champion of globalisation. However, this misses the fact that since the crisis a debate has raged between central bankers on the merits of the internationalisation of finance.

Since the crisis global capital flows have collapsed. During it, the risks associated with cross border contagion were all too obvious. The UK has a banking system far more reliant on foreign branches based here than either the US or the eurozone. In recent years, their support to businesses here has waned spectacularly.

Still, Mr Carney was clear that he believed international capital was more blessing than burden. He said he was still keen for London to maintain its status as a global financial centre. Read more

Chris Giles

The rate of unemployment was published to day and sits at 7.7 per cent in the three month period between June and August. It is the last set of figures to be published before the next Bank of England inflation report as the next monthly publication date coincides with that report on 13 November. What better time, then, to compare the BoE’s all-important August inflation report forecast with the published official figures.

In the August forecast, the BoE mean prediction for Q3 unemployment rate was 7.9 per cent, with a standard deviation of 0.1 percentage point around the mean. In English: after adjusting for risks, the Bank thought unemployment was not likely to be more than 0.1 percentage point away from 7.9 per cent and almost certainly not 7.7 per cent*. In lay terms, the forecast below was a stinker.

I am not concerned at all that the BoE produces a horrible forecast. That’s life. It has no bearing on the BoE’s credibility. What matters is the way the central bank will respond. There are two broad sorts of responses it can choose. Read more

Chris Giles

The Office for National Statistics reports today that the house price index “surpassed its previous peak” in July by 0.3 per cent. Boom, boom, bubble, bubble Britain appears to be the right description.

Yet Sir Jon Cunliffe, the incoming deputy governor for financial stability of the Bank of England said yesterday that the housing market was “patchy” and he dismissed bubble fears.

Sir Jon is far from stupid, so why does he see the market differently to Britain’s national statisticians? Read more

Chris Giles

If you look at one chart in the October 2013 World Economic Outlook, make it chart 1.13. For successive IMF forecasts, the chart shows how far output is below the pre-2008 trend. This sort of “hedgehog chart”, so called because the spikes from incorrect forecasts can resemble the creature, demonstrates how thinking has changed in the fund since the crisis started.

A number of things stand out.

1. For most areas, the red line, representing the forecast produced in April 2009 at the worst moment in the crisis initially proved too pessimistic. The world did better than feared.

2. Sadly, most areas are no longer beating the April 2009 forecast. Output in the world economy is now below that forecast for 2013 for the globe, the US, the eurozone and Japan. In developing Asian economies, output is now projected to fall below the 2009 forecast next year. April 2009 still appears too pessimistic only for Latin America, a region many think has been disappointing of late. Read more

Chris Giles

Forget triggers, thresholds, knockouts and long lists of conditions, Paul Fisher, the Bank of England’s head of markets, says everyone is wrong to think forward guidance is complicated. The policy was summarised in a single simple sentence of the BoE’s explanatory document, he said in a speech today.

This is the sentence: Read more

Chris Giles

On Thursday evening, I put out the following tweet after reading Martin Wolf’s trenchant column on austerity.

It was a throwaway remark relating to an academic paper by Òscar Jordà of the Federal Reserve Bank of San Francisco and University of California, Davis and professor Alan Taylor, also of UC, Davis. I will confess that I had not read the paper when I tweeted, but had read this summary on

The paper has gained celebrity status among economists and commentators who like to criticise the UK government’s fiscal policy. Martin Wolf has quoted it repeatedly, as has Jonathan Portes, director of the National Institute of Economic and Social Research and many others including professor Simon Wren Lewis of Oxford University.

Quite properly, Prof Taylor emailed me on Friday to ask why I was so “deeply unpersuaded” and asked me to account for my words. This has sparked a lively email exchange between us, which I think has informed both sides and certainly forced me to read the full paper closely. The emails are private, but I think the paper has gained such traction that my concerns deserve to be written down. Some of them were prompted by this excellent blog by David Smith, economics editor of the Sunday Times.

In a nutshell, while I think the new estimator in the paper is clever, its application to the UK as an example is wrong. The upshot is that the headline result — that three fifths of the UK’s growth disappointment is caused by austerity — is not supported by the evidence in the paper.

I am not claiming a “Reinhart and Rogoff” moment, and nor is David Smith to my knowledge, but it does serve to illustrate that understanding your data is as important as getting the right econometric estimator and that I am surprised that so many UK academics did not spot the causes for concern. If they did, they chose not to highlight them.

A separate point is that when academics have been using the paper as a weapon to bash the Treasury, they have not looked at the size of the effect Jordà and Taylor are claiming. They claim austerity from 2010 to 2013 has left the level of gross domestic product 3 per cent lower than it would have been had there been no consolidation at all. This is not a large number and very close to the view that the Office for Budget Responsibility would get using its modest fiscal multiplier. It estimated output was already 1.4 per cent below the level of “no austerity” in 2011-12 after which there were two more years of deficit reduction pain implemented.

So, the result, even if true, does not prove deficit reduction to be misguided. But that is for another time, the issue here is what is wrong with the claim that three-fifths of weakness is caused by austerity and that austerity has hit ouptut by 3 per cent. The short answer is “a lot”. Read more

Chris Giles

London’s weather has been balmy and hot since Mark Carney became Bank of England governor. Only marginally less absurd have been other reviews of his first week in the job such as the BBC’s efforts to link a 6 per cent rise in equity prices to his tenure at Threadneedle Street.

The FT gave a more sober analysis of the first week on Saturday, pointing out how difficult it is for anyone to fight the Fed. The BoE’s statement on Thursday that rises in market interest rates since May were not warranted, seemed not to have impressed government bond or forward interest rate markets much by the end of the week.

A few days on, it is only fair to have another look. And the delayed reaction is more favourable to Mr Carney’s action, although it remains far too early to declare victory for forward guidance. Read more

Chris Giles

The picture you need to look at today regarding the UK economy is the revision to the level of real gross domestic product. The recession was deeper than thought, so the distance Britain needs to travel to regain the 2008 peak is correspondingly higher. Compared with the 1997 to 2008 average, output is now 17.7 per cent below that line.

The chart shows the old and new real GDP levels rebased to 1997 Q1. As is immediately obvious, the main revision is to the extent of the recession and the recovery looks similarly weak. The “double-dip” has been eliminated, but this is a side-show.

If you look at a nominal GDP chart on the same basis, you see this. Since there have been upward nominal GDP levels revisions and downward real GDP revisions, the revisions reflect a big change in in the deflators (estimated inflation) – specifically an upward revision to the estimate of inflation in investment goods. This means for example that real investment in 2009 is now estimated to have fallen by 16.7% not 13.7%.

What should we conclude? Read more

Chris Giles

Consistency and being boring have always been close to Sir Mervyn King’s heart. So, speculation over the tunes the departing Bank of England governor will pick when he appears on BBC Radio 4′s Desert Island Discs on Sunday is misplaced. Unlike the economy, Sir Mervyn’s history does not change and his choices should be entirely predictable.

Here goes for five of his eight choices: Read more

Chris Giles

In April, the International Monetary Fund positioned itself to go head-to-head with the UK government over its fiscal stance. The fund said it wanted Britain to consider slowing deficit reduction and Olivier Blanchard, its chief economist, said the country was “playing with fire”.

A month later, the considered view of the IMF is much more nuanced. Here are the five things you need to know about the fund’s retreat.

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