A James Alexander post
It is always amazing that the UK statistics authority can produce a Real GDP estimate four weeks after the end of the quarter. They do admit that there are often large revisions due to the fact that less than 50% of the data is in the bag, particularly lacking are the third month surveys of business output, ie September for the 3q15 number.
The first Real GDP estimate is based on the first estimate of inflation-adjusted, industry by industry value added, or GVA – and is always about 90% of RGDP. The statisticians have to add back taxes on production and take off subsidies on production to get to the bigger number.
The Real GVA figure, technically known as the “Chained Volume Measure at Constant Prices” is itself half based on GVA at Current Prices, ie Nominal GVA. This data is a hotpotch, some actual physical output, grossed up to a “Current Prices” value are included as are the actual (ie nominal) turnover numbers from the business surveys, particularly for the service sector where physical output is almost impossible to measure.
Around half of GVA numbers are not from reports of business turnover but physical production numbers (for manufacturing and construction), sales figures (for retailers), imputed rent (for the value of owner-occupied housing) and government expenditure (for bureaucrats, teachers and health workers).
In order to get from the nominal GVA figure to the real GVA and hence to RGDP the statistics people have to use a deflator. The estimate four weeks after period end is clearly not considered good enough to release to the public but it is being used nonetheless. Given that real YoY GDP growth in 3q15 is put at 2.6% and nominal GVA 2.0% then the deflator is around 0.6% YoY. This ultra low figure is not a million miles from the very low YoY (and not very reliable, admittedly) CPI figure of 0% for September released two weeks ago. If you really are targeting inflation things look really grim.
If you are implicitly targeting NGDP, as the Bank of England probably is, then things are equally grim. The nominal GVA figure is very closely followed by the first estimate for Nominal GDP released several weeks later. For the second quarter in a row nominal growth has been horribly low. the last time it was this low was in 3q08 just before Lehman. In 4q08 nominal GVA began to crash and was YoY negative for four quarters. Sure, the Bank of England could wait until the first “proper” NGDP estimate in a month’s time, but in the meantime be very, very careful – remember 4q08. The same goes for the Fed, too.
The supposedly strong retail sales figures for September could well be giving us a bad steer. The “strong” number was a quantity figure up by 6.5% YoY. Nominal sales (ie by value) were up just 2.7% YoY as in-store prices collapsed at a record-equalling rate of negative 3.6% YoY. The figures are further messed up by a continuing surge in online sales vs physical sales.
This is a really, really dangerous time for the UK economy. Monetary policy is very tight indeed. Yet what is the Governor of the Bank of England saying? A barking dog makes more sense. What is the market thinking about UK monetary policy? It has no idea either.