UK NGDP turns up a little but still dragging down RGDP

A James Alexander post

First release of UK RGDP for 1Q16 today was in line with expectations. This is not saying much at it is just 2.1% up on the year ago quarter and trending down.

Much worse news was that Nominal Gross Value Added (or “GVA at Current Prices”, a close proxy of the not-released-for-another-4 -weeks NGDP) is still limping along below 2% per annum and will continue to depress real growth. Households will continue to feel there is no growth while the economy appears so lacklustre. Real growth (RGDP) will continue to be dragged down by weak nominal growth (NGDP).


The crucial point missed by mainstream macro is that economies need micro-flexibility to promote efficient allocation of labour amongst different companies and sectors without some companies hitting downwardly sticky wages and thus forcing mass lay-offs. With 5% nominal growth gentle reallocations can occur via money illusion, as some employees in relatively declining industries or companies can lose real income but not lose their jobs. With 2% or less nominal growth nominal weakness in revenues forces nominal cuts in expenses and thus real job losses – and lost real GDP.

There has to be a huge caveat on these first release nominal GVA/GDP figures given large errors in the series seen in recent quarters on top of the inevitably large adjustments made as more data on the quarter is collected. To be fair, the trend NGDP had looked worse even  but the really bad figures have now been revised up a little.

Although Nominal GVA was reported at 1.9% and thus a small increase on the 1.4%  in 4Q15 the figure implies the official implied deflator, and the best measure of inflation we have, is still negative. That is, you have to inflate Nominal GDP to get Real GDP, rather than the usual deflating of Nominal to get Real. Confusing? Well, that is the actual deflationary world we live in these days for you.

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