UK NGDP growth flashing red

A James Alexander post

Back in late October we highlighted the collapse in growth of UK NGDP as proxied by the release of the 3Q15 Nominal Gross Value Added (GVA) figure. Things have now worsened. Growth has dropped from 2% YoY to less than 1%. Where is the Bank of England? Where are their political masters, the UK Treasury? Are they all asleep at the wheel? Hello? Wakey, wakey!

It is not just the risk of falling revenues leading expense reductions combining with the usual “sticky wages problem” forcing employers to cut staff, although this should be alarming enough on its own. It is the huge hole in tax revenues that will open up that should alarm the UK Treasury. They need nominal growth to reduce the deficit, and slow the growth in national debt. They are happy enough, and possibly right, to attempt to constrain public sector spending, but a recession will mean years of hard work washed away in an instant. NGDP growth should be their top priority, for both issues.

The figures are alarming

In it’s first estimate of RGDP the UK’s Office of National Statistics is unable to give us a figure for Nominal GDP. This situation is highly unsatisfactory for what should be the key measure of monetary policy. They don’t devote a lot for resources to its proxy either as the initial 4Q15 GVA figure contained a bad and obvious error (spotted by yours truly) and had to be withdrawn for a few days before reissue.

The reissued had no bad or obvious error, it just looked bad. UK NGDP growth had been running at a too slow 4%, before crashing down over the last 4 or 5 quarters to 2% and now less than 1%. There is some stuff going on in the wider world, but in common with the US central bank, the Bank of England has been talking the tightening talk for a year, and has now reaped the consequences.

Carney is only chasing the game

Of course, Mark Carney is no Meryvn King or Trichet-like dogmatist and can react to markets, but the damage has been done. Ask any sports team manager and you´ll hear that chasing the game is a lot tougher than leading the game. And Carney is chasing the game.

However interesting, try not to dissect the output data

Nerdily-speaking, GVA is about 90% of the GDP figure, the other 10% is the rather mysterious “Basic Prices Adjustment” (BPA), to add a large slug of taxes on production that are paid by final buyers of that output (less a miniscule amount of subsidies on production). BPA is a very stable number.

More nerdily, GVA is the building block for the output version of GDP, the prime method in the UK for measuring GDP. The other two methods are expenditure and income, but are usually adjusted” to the output result. In contrast, the US gives primacy to the expenditure method, and adjusts the other two to it. It is rather irrelevant as the main issue is speed of deliver. The O, I and E measures should all equal each other. They often use similar fundamental data anyway, just released at different times, and at the micro level are used to check the reliability of each data set.

Even more nerdily, and as an example, wage income and gross profits in the media sector should equal money spent on media products by consumers (films, games and TV etc) and should equal the value-added of output too (calculated, using similar data sets, as all sales less sales to other producers, i.e. intermediate sales).

One can look at the industry breakdown of UK GDP, via the industry-by-industry contributions to GVA. For monetary policy it doesn’t make any difference, tight money is tight money as evidenced by weak NGDP growth – please stop looking at the level of interest rates and the amount of QE, they tell us little about the stance of policy. Indeed, rates are usually high when monetary policy is loose and NGDP is growing fast.

There will still be relative winners and losers in an economy whatever the stance of monetary policy, and analyzing individual industries performance can easily mislead policy makers into thinking it is the fault of the relative losing industry dragging down growth when its monetary policy.

The output data is probably as good as it can be, but still not much use

That said, there appears to be some underlying changes still working through the economy. Manufacturing is in relative decline versus the services sector. But so what. In any case the “service sector” is so huge and poorly understood that it is impossible to really see the drivers of the switch from manufacturing. IT is in services and growing, but should it really be in manufacturing? Consultancies likewise, aren’t they just outsourced management?

The ONS, like most other national statistics authorities, collects agricultural, extraction and manufacturing industry output in minute detail, with around 61 separate categories of data – yet these sectors account for just 20% of national output. There are only 51 data points for the 80% represented by services. The ONS is steadily working to rectify this problem via a number of initiatives, but it is very hard work indeed.

It is highly entertaining to read all the wordy, earnest, discussions about productivity when so little is known about 80% of the economy. Still, discussing the productivity crisis (or miracle) is nice work if you can get it.

One oddity is that while the manufacturing sector is in recession, the extraction sector is apparently growing in real terms but crashing in nominal terms. Mmm.