A James Alexander post
Last week Eurostat released the 3Q15 RGDP numbers of the Euro Area. The numbers were OK and broadly in line with expectations.
They aren’t that interesting to Market Monetarists, we want to see NGDP numbers. For what it is worth Euro Area RGDP growth YoY in 3Q15 was up at 1.6% vs 1.5% for the 2Q15. Slightly better news, although it should be remembered that these are very early estimates.
Frustratingly, Eurostat doesn’t release the NGDP until 10 weeks after the end of the quarter. We only get NGDP numbers for selected European countries. Here there was better news for France, especially.
French RGDP came in line with expectations at 1.2%, up from 1.1%. Small changes on small numbers, I know, but at least heading in the right direction. But French NGDP accelerated to 2.7% YoY dragging up that RGDP.
It looks like the French long-term RGDP growth rate has been around 1.5% since 1990 or 1.8% if you include the more volatile, but higher RGDP growth, 1980s. In order to get just the 1.5% real growth, France needs 3.2% NGDP growth. In order to get to the heady heights of 1.8% France has historically had to “endure” (irony alert!) 4.3% NGDP growth.
Market Monetarists suggest a target for expected NGDP Growth of 5% for the US, in line with long-run averages. If France could also cope with 5% NGDP growth, who knows, she might get over 2% RGDP growth. Would 3% inflation be such a disaster? Obviously, if it led to a volatile NGDP growth as seen in the 1980s, maybe not. But target a steady 5% and who knows what RGDP might be able to deliver!
And what additional human happiness might higher RGDP engender, to help ward off greater tragedies. Lars Christensen posted a link to a fascinating piece the other day, testing for a link between NGDP shortfalls and freedom. ECB monetary policy makers and their political masters should take a look. Inflation doesn’t lead to the loss of freedom, but deflation does. What a lot Jean-Claude Trichet has to answer for in trying to prove that French central bankers could be as hysterically anti-inflation as German central bankers. But then France experienced a similar failure in the 1930s, with the most extended Great Depression of any major country. They never seem to learn. Thank you, someone, for Mr Draghi!
For balance, we have also examined German RGDP growth. Over the last 25 years, which includes the unification boom and bust, Germany has averaged just 1.3% average RGDP growth, lower than France. And NGDP growth has only been a tad lower at 3.0%.
Momentum in the last few quarters seems to be with France. We hope it will continue. The good thing about the encouraging trends is that the ECB seems very concerned with low headline inflation and is set to ease policy further. Sadly, by “easing” we only expect more QE for longer, i.e. more pushing water uphill rather than the simpler, more effective and quicker option of just altering the targets.
The first step to really effective easing would be to raise the inflation target and do away with the crushing, dispiriting, and downright counter-productive “close to, but not above 2%” language and adopt flexible inflation targeting or, better still, the ECB should suggest adopting NGDP level targeting and stop chasing such flaky and meaningless numbers as HIPC.