The UK has spent years fretting about its dismal productivity performance in the wake of the financial crisis, but it’s no closer to figuring out what has gone wrong or what (if anything) should be done about it.
Perhaps it should look further afield. The UK is not the only place with a “productivity puzzle” on its hands: New Zealand is scratching its head too. For a developed country with seemingly supportive policies on tax, regulation and education, New Zealand’s workers are surprisingly unproductive, and they don’t seem to be improving very quickly either. Read more
Mark Carney, the incoming governor of the Bank of England, was grilled by MPs and his ECB counterpart Mario Draghi faced awkward questions. By Tom Burgis, Ben Fenton and Lina Saigol in London with contributions from FT correspondents. All times are GMT.
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
Martin Weale’s speech today shows how far the policy debate has shifted at the Bank of England. As recently as early July, this external member of the monetary policy committee was voting for higher interest rates. Now he is openly talking about restarting quantitative easing.
Mr Weale should certainly be praised for being as good as his words. In March he said he was perfectly happy to change his mind if the facts changed and he has done so. No longer voting for a rate rise does not indicate a previous error of judgment, only that circumstances have changed.
From his speech today, Mr Weale, one of the more hawkish MPC members, now clearly thinks that UK QE2 might be necessary and he believes it would work. 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 week. Read more
Jean-Claude Trichet spoke at the LSE on Monday afternoon.
Much of what he said was a combination of a couple of speeches he gave last week, the central message being that the eurozone needs to monitor member countries’ fiscal and macroeconomic policies and competitiveness more closely, and that there needs to be a sharper stick with which to beat countries that fail to behave themselves. Read more
The UK’s economic performance over the past year is no surprise. When you tighten fiscal policy significantly after a major financial crisis, both history and mainstream economics would tell you to expect what we have now : no growth in broad money or credit, persistently high interest spreads for small businesses and households, flat or contracting private consumption and retail sales, a dearth of construction and declining real wages – all only partially offset by some expansion in exports. In such a situation, you should expect little domestically generated inflation, and that is also just what the UK has.
Charlie Bean, deputy governor of the Bank of England, has been seen as one of the swing voters on the Monetary Policy Committee. If he is one of the people who would have to vote for a rate rise, he does not seem like he is itching to pull the trigger any time soon.
In the speech he has just delivered in Northern Ireland, he thinks the signs of limited supply capacity and poor productivity is nothing more worrying than “puzzling”, he notes that there are persistent output losses after banking crises, is not too concerned about inflation or inflation expectations, but sounds most upset about the weakness in demand at the moment.
Worries about demand weakness with puzzlement about supply is not what constitutes a rate hiker. That rate rise might be on hold a bit longer. Read more
Ben Broadbent, the new member of the Bank of England’s Monetary Policy Committee, is just about to start his confirmation hearing in Parliament (more later). But he will have to deal with today’s inflation figures for April, which have pushed CPI inflation up to 4.5 per cent from 4 per cent in March as shown in the picture.
But though Mr Broadbent did not know the following, he had little need to worry. The April CPI is heavily distorted by the timing of Easter and its effects on air fare prices. Some 0.36 percentage points of the 0.5 percentage point rise in inflation has come from air fares. Read more
Late in the day, the Bank of England has just slipped out a press release revealing that one member of the new Financial Policy Committee has decided not to take the job.
Richard Lambert, former head of the CBI employers’ organisation and editor of the Financial Times, says the post would cramp his stlye:
“Since leaving the CBI I have spent a period away from work and on reflection I have decided, with great regret, that I do not wish to take up my position as an external member of the Bank of England’s interim Financial Policy Committee. I wish to devote my time to a wider range of aspects of public policy. And membership of the committee could place constraints on my ability to do so. Mervyn King, the Governor ofthe Bank, has been very understanding about my change of plans. I wish the committee every success inthe important work which lies ahead of it.”
I have just spoken to Mr Lambert Read more
In doing the usual due diligence on the Bank of England’s pictorial forecasts – blowing up the images on screen, getting out a ruler, measuring the YoY growth rates, estimating the skew that represents a risk-adjusted forecast and shoving all the results into a pre-prepared spreasdsheet – you can produced this horrible chart of successive Bank of England growth forecasts.
All it really shows, in the grand scheme of things, is that the Bank’s growth forecasts were pretty good before the crisis and spectacularly awful more recently.
If you strip out a lot of irrelevant information, you get the following, which I think is pretty amazing. Read more
Mervyn King was in typically subdued form, presenting yet another inflation report in which the Bank of England has revised higher its forecast for inflation and revised lower its forecast for growth.
As I will go on to explain, the Bank has significantly revised its growth forecasts lower – losing about 1 year of growth at current rates since February’s forecast – but the Bank governor was rather reticent to spell this out.
The “big picture”, he said, is that the Monetary Policy Committee’s “medium term judgment is broadly the same” as it was in February. I will come back to this, but the governor was looking at a particular way of reading the Bank’s forecast growth rates in 2013, not the level of output. As he is the first to assert, it’s the levels that matter, stupid, not the growth rates.
The level of output the Bank believes is sustainable has declined a lot in the latest forecast. I have a pretty good record of decoding the Bank’s pictorial forecasts and I estimate the Bank has reduced its central forecast for the level of output in Q1 2014 by 1.7 per cent. At current growth rates, we seem to have lost a year of growth in forecast revisions.
Before I show some forecast charts, here are the answers to my questions from last week we learnt from the governor this morning.
1) How permanent does the MPC judge the winter slowdown to be? Read more
Yesterday’s decision to keep monetary policy on hold in the UK was such a foregone conclusion that it barely made ripples. But predictability does not mean the Bank and economists are equally calm beneath the surface. Rather, they are furiously paddling to try to work out what on earth is going on with the British economy.
Here, I will try and present a pretty neutral post on the current outlook, against which to judge next week’s Bank of England Inflation Report.
Why was the rate decision so predictable?
Compared with April, the latest data showed a small and possibly temporary drop in inflation, weak first quarter growth figures and no let-up in uncertainty.
In these circumstances, any converts to tighter monetary policy would find it tricky, to say the least, to justify their new hawk status. Read more
The odds were firmly in favour of a rate hold, and the Bank of England has not disappointed us. More interesting will be the voting pattern, when it is released on May 18.
Annual inflation in the UK is running at 4 per cent, a welcome fall from 4.4 per cent earlier this year. Read more
Interest rates are likely to linger for longer at their current record low of 0.5 per cent, following today’s growth figures. With GDP numbers coming in at expectation, market expectations haven’t shifted that much since yesterday, but over the past two months, the change is dramatic (see chart).
Just two months ago, markets forecast three rate rises this year; now the base rate is not expected to reach 0.75 per cent until November. The data also belie an assumption that a rate rise is far likelier in a month following a GDP announcement (notice the jump in expectations for August, November and February). Read more
For those wanting a primer on how to interpret the 0.5 per cent rise in UK GDP in the first quarter this morning, you could read this piece from the FT yesterday. But I will also summarise the maths and its implications here.
The 0.5 per cent figure suggests the economy stagnated at best in the six months between the third quarter of 2010 and first quarter of 2011 and probably contracted a little. The stagnation bit is easy to see, since the level of GDP in Q3 2010, with an index number of 99.6, is the same as that in Q1 2011.
The “at best” bit comes from the fact that some of the activity that would have taken place at the end of last year, but was disrupted by the snow – distributing goods or maintenance of equipment for example – will have taken place in the first quarter, flattering the latest figures. We don’t know how big this effect was, but can put boundaries on it. At best, the economy stagnated. At worst, if all of the 0.5 per cent of activity lost in the fourth quarter was displaced into the first quarter, the underlying level of activity is now 0.5 per cent lower than that in Q3 2010. Read more
No-one could accuse Andrew Sentance of leaving the MPC without making his position clear. The Bank of England’s chief hawk has just laid bare four key differences between his rate-raising position and that of the rate-holding majority on the MPC.
Disagreements on the UK’s rate-setting committee are fundamental, he says first. In the past, they have been a matter of timing. “I acquired my hawkish mantle much earlier [than last year], when I voted in a minority on a number of occasions to raise interest rates in response to the relatively strong growth and rising inflation we were experiencing before the financial crisis,” he says. “Those minority votes, however, were the expression of modest differences in the timing of interest rate changes.”
This time, the differences are directional. At their root lie contrasting assumptions about the global economy, and disagreement over economic models. Mr Sentance is due to leave the Committee at the end of next month, but the differences he describes are likely to survive him.
In comparison with the rest of the committee, Mr Sentance seems more optimistic on the global recovery, more doubtful about the use of the output gap as a policy tool, and more flexible on sterling appreciating. He is also worried about inflation expectations. Read more
Consumer price inflation has fallen back to 4 per cent in the UK, against expectations that the rate would hold steady at 4.4 per cent. Month-on-month, prices rose by 0.3 per cent.
Food and non-alcoholic beverage prices drove the reduction. Supermarket-led sales helped to temper price rises across a broad range of foodstuffs. Fruit, bread and cereals were particularly affected. Overall, the change in food and beverage prices contribued -0.2 toward the -0.4 percentage point change between February and March, though the category as a whole still rose 4.5 per cent y-o-y. Read more
As expected, the UK’s central bank has kept the bank rate at 0.5 per cent and held the stock of assets at £200bn. The last change in the rate was a half point cut in on March 5, 2009, while the most recent change in the asset scheme was November 5, 2009. Consumer prices rose 4.4 per cent in the year to February, more than twice the Bank’s inflation target.
Martin Weale, one of the external members of the Monetary Policy Committee gave a speech last night, which was fascinating for anyone interested in the presentation of monetary policy in an uncertain world.
Policy. Regarding the UK interest rate debate, he did not have much to say, save for reiterating that CPI inflation looks likely to get close to 5 per cent. He also had a powerful argument for the Bank staff who fret that its reputation might be damaged if it raised interest rates only to discover this was wrong and had to subsequently reverse the decision. Though that scenario would be bad for the Bank’s credibility, it would also be bad to use this concern to avoid an interest rate rise only to find subsequently that it was warranted, Mr Weale said.
Uncertainty. But the comments on monetary policy were a side show in the talk to the much more meaty discussion of how to present uncertainty in economic forecasts in a way that demonstrates accurately the state of knowledge about the future, which is greater than zero but far from complete.
Mr Weale’s contribution was to suggest we split the known unknowns – arguments over theory, some model parameters and judgments on things like the right future oil price assumption – from unknown unknowns – stuff that happens. Read more