UK economy


Drug-dealers and their customers in the UK may be breaking the law, but at least they are making us richer. Illegal activities such as prostitution and drug dealing will add £10bn to the UK economy, the Office of National Statistics said today, as part of an overhaul of how we calculate national gross domestic productRead more

There is a chart regarding the UK economy which has become so ubiquitous it is known in our office simply as “the Niesr chart”, because it is often republished by the National Institute of Economic and Social Research. It is supposed to be a clear and concise account of Britain’s recent economic woes, putting the recession into accurate context of past recessions. It shows the current recession as the longest and nearly the deepest since the start of the 1930s. People don’t generally know that in the UK the 1920s recession was much worse, but I’ll leave that for now.

Here is the latest version of “the Niesr chart”, published today. Take a good look at it before I tell you why I have begun to become irritated by it.

It is arresting because it does most things right. It is simple to understand. It is clearly drawn and obviously in context. The problem is that that the Niesr chart might be showing us irrelevant nonsense. It is also not a sufficient description of the UK’s recession. Read more

Britain is back in recession – gross domestic product fell by 0.2 per cent in the first quarter of this year – following a 0.3 per cent fall at the end of 2011. What should we make of the figures?

1. Is this a deep recession?

No. It is nothing like 2008-09 when output dropped 7 per cent over five quarters. In truth, as Joe Grice, chief economist of the Office for National Statistics said, the economy has been broadly flat since the third quarter of 2010. Some quarters up a bit, the others down. The level of output is now measured at an index number of 98.1 (2008=100) and it was 98.3 in the autumn of 2010. Read more

What was that infamous “Jo Moore” phrase again?

Yesterday certainly was “a good day to bury bad news”. As all eyes were focused on the News of the World phone hacking scandal, the government slipped-out an announcement that its preferred candidate for the new chair of the UK Statistical Authority withdrew her candidacy.

MPs were not convinced Dame Janet Finch, a paid up member of the non-executive great-and-the-good, she was sufficiently independent to be an effective watchdog over official statistics and ministerial spinning of data. The good news for all those interested in clear official data and wider access to information held by government is that the next candidate put forward by government must know they are there to serve the public not the government.

This creates the possibility of a new dawn for UK statistics. all areas including monetary policy will be more transparent and, even if pre-release of data to ministers is curtailed, the Bank of England is unlikely to find its job of controlling inflation compromised.

What was wrong with Ms Finch? She gave a shocker of an interview to MPs last weekRead more

Mervyn King has just delivered an important speech in Newcastle. As ever with the Bank of England governor, it is extremely well-written and his argument is tight. The speech is, however, infused with overwhelming self-belief and even arrogance in the face of difficult economic circumstances. Those, in a nutshell, are Mr King’s great strengths and weaknesses.

This is far from an attack on the governor. I think his “big picture” view is correct, but his unwillingness to concede mistakes undermines policy and damages the Bank’s credibility, making the Bank’s job of getting its message across rather harder than it need be.

The big picture should come from him.

“We must not lose sight of the big picture. Large – very large – shocks to relative prices are an inevitable part of the real adjustment vital to the rebalancing of the UK economy.

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In recent weeks, the Bank of England’s problem has been inflation. It is too high at 3.7 per cent in December and going higher. Now the Bank has something apparently worse on its hands: stagflation. The Office for National Statistics has just shocked everyone by saying the UK economy contracted by 0.5 per cent in the final quarter of 2010. Expectations had been for a 0.5 per cent increase.

Nothing could cheer the Monetary Policy Committee more. Now it can bat away suggestions it should be raising interest rates with the comment that this would be nuts as the economy is again contracting. High inflation is nothing to worry about if the economy is still in intensive care. Read more

In a mixed set of British labour market figures today, unemployment was up, the claimant count was down, and earnings growth was rather flat. There was nothing in the figures to suggest inflation is getting out of control and when you look at the details of the Labour Force Survey data, it becomes clear that the employment picture will worsen over the next two releases.

How can I be so sure? Because the official employment and unemployment figures are based on a rolling three-month average, but the Office for National Statistics also publish  monthly data for transparency. November was a shocker. The charts show this, with the employment rate falling to its lowest level since the crisis started offset by a spike in inactivity not unemployment. Read more

In today’s forecasts for the  2011 UK housing market, the Council of Mortgage Lenders worries that banks and building societies will not be able to lend much next year, partly because they will have to refinance large amounts of wholesale lending and pay back £130bn to the Bank of England in respect of the 2008 Special Liquidity Scheme which will expire in January 2012.

It says prospects have improved, but still implies that borrowers will be the main losers of the Bank’s demands to be repaid:

“The big issue for lenders next year will be to re-finance existing wholesale borrowing and begin to pay back the very large amounts of funding advanced through official support schemes. However, the prospects of them being able to do this without adversely affecting the market have improved. The amount due to be repaid under the special liquidity scheme by January 2012 has declined from about £180 billion to around £130 billion currently.

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We are beginning to see a flurry of concern at the Bank of England about high UK inflation. The annual rise in the consumer price index in November was 3.3 per cent, well above the 2 per cent target and higher than City expectations. The Monetary Policy Committee would have had sight of this figure last Thursday when it kept monetary policy on hold. Even so, there does appear to be a rising level of concern in Threadneedle Street about inflation.

We know from votes and speeches that Andrew Sentance is worried about the credibility of the Bank of England’s monetary policy when inflation is persistently far from target. He is not sounding such a lone voice these days, however. Charlie Bean’s speech yesterday was notable for the increased concern over inflation and Spencer Dale noted earlier this month that the Bank “might not appear to have done a very good job recently” in hitting the inflation target.

As the chart shows, the MPC collective forecast also shows a reasonable risk of inflation exceeding 4 per cent in the year ahead. Read more

Giving evidence to the Treasury Select Committee this morning, George Osborne claimed the UK economy was back on track.

He added that it was pretty clear to him that the previous Labour government had overstated trend growth for much of its time in office and there had been a big “boom” in the economy for much of the decade.

Warming to this theme, the chancellor referred the Committee to his favourite chart of the June Budget, which shows what the output gap would have looked like if a more modest figure – and what Mr Osborne said was “more realistic” estimate for trend growth – had been assumed by the previous government. Read more

These are the clearly audible words spoken by Michael Fallon, member of the Treasury Select Committee, to Andrew Tyrie, the Committee chairman at the end of the evidence given by Robert Chote, new chairman of the Office for Budget Responsibility.

Why did Mr Fallon MP call for the return of the Treasury’s chief economic adviser rather than the shiny new representative of the independent OBR?

Briefly, because Mr Chote irritated the Committee by playing with a dead straight bat, avoiding questions and talking round issues. The Committee was upset that the OBR had not performed sensitivity tests on not-so-extreme scenarios such as large exchange rate fluctuations following a crisis in the eurozone and that the scenarios tested by the Office were pretty benign.

The result was much as with Martin Weale’s appointment to the Monetary Policy Committee Read more

There is inevitably a focus on forecast revisions when any official body produces new predictions about the future. Today the Office for Budget Responsibility, Britain’s new fiscal watchdog, raised the 2010 growth forecast to 1.8 per cent and dropped the 2011 forecast from 2.3 per cent to 2.1 per cent, as the FT reported in recent days.

Robert Chote, the OBR’s new chair, also gave his endorsement to the deficit reduction plan, saying the government had a greater than 50:50 chance of wiping out the hole in the public finances within five years. All of this was incredibly easy to predict.

The interesting decisions taken by the OBR were on its estimate of the fiscal multiplier and its view of the degree of spare capacity in the economy.  The first matters because it determines the official view of the effect of budget consolidation on growth. The latter matters because the degree of spare capacity determines the OBR’s view of the size of the hole in the public finances, but has the annoying problem of being impossible to measure. On these two issues, Mr Chote is gung-ho on the multipliers, but displays wise caution on sounding too certain about spare capacity. Read more

As the overall level of growth in the UK continues to be robust – at 0.8 per cent in the third quarter – the detail of the figures just published will keep everyone guessing about the sustainability of that growth. Good news and bad news are evenly balanced and the economy is far from set fair or obviously a basket case. That is why the mushy middle prevails on the Monetary Policy Committee

Good news

  • Market sector output. Real market sector output grew by 1 per cent in the third quarter, indicating robust demand. It has expanded 3.4 per cent in the year to the third quarter, indicating that the willingness to pay for additional goods and services has been strong since late 2009 and the private sector has been in good shape. This bodes well for the consolidation ahead. (Market sector output represents goods and services produced and sold in markets at meaningful prices. Most private sector activity and public sector stuff such as planning fees are included. Direct provision of free-at-the-point-of-use health and education services are excluded.)
  • Broad based output gains. In the third quarter, services accounted for half the 0.8 per cent GDP rise, construction a quarter, and production the rest. The expansion was not dominated by one sector, even if construction gains were disproportionate to their size in the economy.
  • A welcome boost from net trade. When looking at the expenditure contributions to growth, net trade (exports and imports) contributed 0.4 percentage points of the growth, indicating that the trade account is finally helping drive prosperity rather than detracting from it. Both imports and exports grew faster than GDP, but exports grew much faster.

 Read more

As per Robin’s Fed post, here is a quick summary of the issues for the November Monetary Policy Committee meeting.

Current policy rate: 0.5 per cent
Current unorthodox measures: £200bn of assets (almost all gilts) purchased
Consensus expectations: No change – a position held by all but outliers

Data developments of note
STRONG initial third quarter GDP – 0.8 per cent
STRONG PMI surveys for manufacturing and services
WEAK US growth offset by STRONGER European data
Still TOO HIGH inflation, but stable with CPI inflation at 3.1 per cent

Developments on Committee thinking
The October minutes were split 1-7-1 with the swing voters on the MPC dovish, but only slightly. Those in no man’s land wanted to see more evidence from data Read more

As far as Britain’s economy is concerned, the spending review, just published, changes little. There was the “reprofiling” predicted first in the Financial Times, but it amounted to only £2bn a year of additional gross capital expenditure. This will not make the difference between stagnation and recovery. The Treasury is right: there is no Plan B.

The big news is pretty much as expected:

  • It’s not a good time to be working in the public sector. You have a good chance of losing your job, you will have a pay freeze over the next two years and you will see your take-home pay cut by an increase in your pension contribution averaging 3 per cent.
  • The chancellor has found another £7bn of further savings from social benefits, which have limited (to some extent) the cuts to public services.
  • After this small mitigation of cuts, departmental budgets will still face the most severe constraints in the post-War period. These will be noticed. They act to bring down the deficit significantly so that public borrowing is expected to be 2 per cent of national income by 2014-15.
  • Health, schools and overseas aid have been relatively protected. Recipients of benefits, public sector employees and local government are the big losers.
  • The government claims the measures are fair. Because fairness is in the eye of the beholder, it has chosen a method of presenting fairness to give this result. This is policy-based evidence-making on heat.

What has really saddened me is the presentation of the spending review. Read more

The recent battle of words on the MPC translated into a 1-7-1 vote at the October meeting with Adam Posen voting to increase quantitative easing by £50bn over an unspecified period and Andrew Sentance continuing to vote for a rise in interest rates to 0.75 per cent.

Between these two now entrenched positions, the rest sit in no-man’s-land, unsure whether the risk that high inflation will dislodge expectations is greater than the risk that significant spare capacity will bring medium-term inflation sharply lower.

The bias of this mushy middle was slightly dovish:

“Some of those members felt the likelihood that further monetary stimulus would become necessary in order to meet the inflation target in the medium term had increased in recent months. But, for them, the evidence was not sufficiently compelling to imply that such a course of action was necessary at present.”

What will be fascinating is Read more

In a balanced speech just published, Mervyn King has coined yet another acronym to describe the UK economy. The acronym is “sober”. More on this later, but at the beginning of the speech, there are some issues with the tense the Bank of England governor chooses to use, which I foresee people taking out of context. He says:

“I find myself in the opposite situation having to explain that there is too little money in the economy.”

This sentence appears to be a signal of more quantitative easing to come in Britain, since if there is too little money in the economy, the Bank should pump some more in. But speaking to Bank officials, I am assured there is no signal in the words and the use of the present tense signifies nothing.

Later in the speech, Mr King is, in any case, Read more

If Adam Posen made “the case for doing more”, and David Miles argued “the case for not doing less”, Andrew Sentance has just pressed “the case for doing less, you idiots”.

I cannot recall a moment in MPC history in which the members have been so openly hostile to each others’ views. It does appear to be war on the MPC.

Robust debate is to be welcomed, since reasonable people should be able to disagree on an analysis of the economy. I, for one, am delighted about the absence of false consensus on the Committee these days.

But the argument on the Committee is quite extreme. Mr Sentance accuses other members of not taking the Bank of England’s remit seriously and clearly feels no need to address directly the arguments put forward by other members.

Let’s try to synthesise where the differences between the members really lie.

How does Mr Sentance’s differ from the other two?  Read more

If Adam Posen’s message last month was, “The case for doing more”, David Miles, another external MPC member has followed with a very clear speech today, which can be summarised as, “The case for not doing less”.

At no point does Mr Miles consider doing more, but he is very critical of those – i.e. Andrew Sentance – who believe monetary policy should be tightened.

If this were a typical recovery, Mr Miles said, there would be a case for raising interest rates now. He cannot prove it will not be a typical recovery, but believes that the upswing will be far from normal:

“A typical downturn is not one in which the financial sector all but stopped working for a while. A typical cycle for the UK is not one in which the exchange rate depreciates by about 25% ahead of the downturn.”

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At today’s Monetary Policy Committee meeting, Andrew Sentance goes head-to-head with Adam Posen in a bid to sway the mushy middle of the Bank of England’s MPC to his point of view. Like most analysts, the betting is that neither will succeed and the Bank will leave policy unchanged with interest rates at 0.5 per cent and a stock of £200bn of assets purchased under the programme of quantitative easing.

As a paid-up member of the mushy crowd, I share Mr Posen’s theoretical concern that deficient demand will have permanent effects, but also Mr Sentance’s observation that the evidence for these worries is lacking.

So, following Robin’s good practice and the wise words of Fed chairman Ben Bernanke from January, I wondered whether the use of a simple rule of thumb – a Taylor Rule – could help guide us where UK interest rates should be going.

The short answer is no. Read more