A James Alexander post
UK RGDP in 2Q 2016 surprised on the upside today with 2.2% annual growth. NGDP also picked up a bit to 2.9%, but is still well below trend.
The numbers are only a first estimates, and there has been some funny business with a usually strong April following a very weak March. In any case no-one is that interested in 2Q as it is all pre-Brexit. No-one will be that interested in 3Q probably either as it will be influenced by the shock of the Brexit vote.
We are also not that interested in RGDP as it is such a low quality number, based on the neglected numbers that go to make up NGDP and the low quality GDP deflator figure that, like CPI, struggles to cope with qualitative and structural change.
NGDP in the UK has been horribly weak for the prior four quarters. The proxy number for NGDP, Nominal GVA, has been even weaker at a less than 2% average over the last four quarters. While the 2Q 2016 figure of 2.9% is better than the recent past it is still far below a healthy level. Only NGDP growth and hence wage growth of around 5% will allow real incomes to show a good diversity of outcomes and thus promote flexibility and productivity growth. Real wages are still squashed down into a narrow range of growth by this nominal sluggishness.
A top priority for the new Chancellor of the Exchequer is to give the Bank of England nominal growth targets for the good of the economy overall and for healthy tax receipts in particular.
Higher nominal growth will also enable the UK labour market to cope with (potential) shocks from things like Brexit, allowing aggregate negative real wage growth without having to go through job and wealth destroying process of aggregate negative nominal wage growth.