UK NGDP growth not playing to Osborne/Carney tune

A James Alexander post

UK NGDP growth was released today together with the second estimate of RGDP figures. NGDP picked up slightly to 2.5% YoY. We had earlier shown a similar trend using Nominal GVA data. The very messy and subsequently revised figures from 3Q and 4Q last year now show two quarters of a very low 2.2% YoY growth.

NGDP growth was very poor before Brexit concerns and has, if anything, now picked up slightly as those concerns have increased. Rather ironic given all the scaremongering – perhaps the GBP weakness helped ease the concerns.

Carney solemnly swore that there had been no government interference forcing the Bank of England to take its strong anti-Brexit stance. We believe him. All the ruling elites of both the UK and the Rest of the World are taking the same view. They are not at the sharp end of the woeful nominal growth that constantly drags down real growth. Above everything they prefer governments to be remote from the public and in the hands of self-selected technocrats who should be trusted to do the right thing.

The evidence from the UK is that Carney is failing badly. “Remain” economists remain surprised by the strength of the Brexit support despite all their best efforts. Well, they should look at nominal growth and not be so surprised. Mainstream macro-economists fail in so many ways, but none more so in their relaxed attitude to low Aggregate Demand (aka NGDP) growth. The Brexit debate is a sideshow compared to this abdication of responsibility.

Carney and his political master George Osborne should have been alarmed at the trend of nominal growth in the UK. Even if Brexit concerns are not preventing a small rise in nominal growth the rate is still far too low.


Carney still believes that the next move is up in interest rates, so cementing a policy of passive monetary tightening. When he strongly repeated his view this week, Sterling rose strongly. Just great. It’s not clear if all his Monetary Policy Committee agree with him but they don’t seem brave enough to speak out much.

In recent exchanges over Brexit Carney looks like a very hard man to cross. His responses to Jacob Rees Mogg in Parliamentary questions over the BoE’s anti-Brexit stance were a cross between Tony Blair and Bill Clinton. About right as he has passed from wannabe Canadian politician to global stage-trotter. He has become the model of a very modern hawkish central banker more concerned about fighting non-existent inflation threats than doing his upmost to help create prosperity. This is a shame.

We had high hopes back in the day he openly talked about NGDP Targeting. If he had to face an electorate worried about prosperity perhaps he would change his tune. It probably wouldn’t have much effect given the little impact it seems to have on his boss, Osborne.

OMG: BoE in 2008 redux

A James Alexander post

The Bank of England appears to have learned nothing at all about the 2008 Great Recession. They are on the verge of making the exact same mistakes as Meryvn King and many other central bank chiefs made in that fateful year. Carney is fretting about headline inflation and other matters while watching NGDP expectations drag down RGDP into a recession.

Rate rise back in the cards as Bank cuts forecasts” warns the headline attached to Philip Aldrick’s lead article in the Business section in The (London) Times today after yesterday’s press conference with Governor Carney at the BoE.

We have finally come to this, 2008 redux. The real economy is slowing, perhaps teetering on a recession. Yet a modest uptick in projected inflation two years out leads the Governor of the Bank of England to passively tighten monetary policy with threats to actively tighten.

The famous fan charts from the BoE show a tiny shift of the centre point in 2018 above 2%. It leads to a furrowing of Carney’s brows and leads him to give dark warnings about having to raise rates. Sterling even rose at first versus the USD despite all the Brexit fears and recession fears pushing it lower.

JA-Fan Chart_1

Yet the same set of data has fan charts for RGDP that show growth dropping below even the poor levels of recent years.

JA-Fan Chart_2

Never was there more need of a switch to NGDP targeting that allows flexibility of inflation targeting to be combined with what is going on in the real economy. Sure, the BoE can’t raise RGDP growth in the long run as they can’t directly impact productivity but they can prevent recessions – and thus lost real output and in the long run lead to higher levels of RGDP than if there were recessions.

Many of the headlines are about Carney’s views on Brexit, but they hide a more damaging ducking of responsibility to ensure price stability, unless there is a major negative impact on economic growth. Raising rates now, or even threatening to do so, is having a major impact on economic growth.

And there certainly will be no price stability if we have a recession. Inflation is bound to slow dramatically. Two wrongs (deflation and recession), no right.

Groupthink at the BoE As UK Monetary Policy Remains Too Tight

A James Alexander post

We have recently discussed groupthink amongst the elite academic macroeconomists in the UK. The same groupthink was visible in the Minutes of the latest Monetary Policy Committee meeting of the Bank of England released today. Aggregate demand growth, aka NGDP, turned down quite badly in YoY in 2Q but was there a word about that from any one of the nine present, of course not.

They all agree things are just right, apart from the Ian McCafferty. He is the BoE’s equivalent of the “always wrong” clique of inflation-scaremonger regional governors like Plosser and Fisher on the Fed’s MPC, aka the FOMC. There are some welcome signs of a pushback from UK macroeconomists but it’s a poor show compared to the US where there is an incredibly active debate across the blogsphere about a September rate rise, with even the 2nd choice for Yellen’s Chair now blogging.

Only here do you read regular news of what is really going on in the UK relevant to best practice monetary policy.

There was the usual fussing over the least important inflation number, headline CPI. It’s 0.1%, 190bps below the target, but will soon,or rather soon’ish rise back towards the target.

Yeah, right. That’s not what markets are saying, they think CPI will average just 1.3% for the next 10 years. Yes, 10 years! But who cares about markets when the MPC Minutes say that “in the third year of [the BoE’s own] projection, inflation was forecast to move slightly above the target as sustained growth led to a margin of excess demand.”

To be fair the MPC had noticed things weren’t going swimmingly in 2Q but on the economist’s other hand some things were going well. They don’t really know. They should look at market-derived NGDP forecasts, but we don’t have those for the UK or anywhere, just for inflation. And they don’t like those numbers anyway as they don’t agree with the BoE’s own projections. They prefer models over markets. Better nine geniuses than the sum total knowledge of thousands of market participants.

The muddled thinking was well demonstrated by the section on wage growth in the Minutes:

“28. Wage growth had picked up over the past year, reflecting the past tightening in the labour market. However, the recent slowing in employment alongside steady output growth implied that productivity had risen, offsetting the effect of higher wage growth on unit wage costs. Annual unit wage cost growth of around 1% in Q2 was some way short of what was likely to be needed to return CPI inflation sustainably to the 2% target.

On one view, the slowing employment data might imply that labour demand had plateaued, and that this would keep pay growth muted. Further improvements in productivity might also limit growth in unit wage costs. On another view, however, the slowdown in employment might reflect greater hiring difficulties, consistent with survey evidence of skill shortages, with the likely consequence of more rapid growth in pay.”

You can see them still clinging, like many elite macroeconomists, to the equally discredited Philips Curve. What is funny about that theory is that we are constantly told that macroeconomics is not like the economics of the household. We shouldn’t worry about national debt, fiscal deficits, etc. But when unemployment drops to a low point wage demand must pick up because labour markets will be tight and aggregate wages must rise. The economics, if not of the household, of the firm.

Aggregate nominal wage growth is a function of aggregate demand not labour market slackness or tightness. The rate of unemployment is irrelevant. And aggregate demand, or nominal GDP, is entirely in the power of monetary policy. Aggregate nominal wage growth can’t escape out of control if monetary policy is prudently targeting NGDP forecast growth of 5% or so.

What 1% unit wage cost growth is telling us is that monetary policy is too tight! Just as, in a messy, mixed up way, is the message from 2.5% nominal wage growth; from 0.1% CPI; or the falling growth of the GDP deflator now below 1% YoY; or the falling growth rate in NGDP.

Never mind, in a July speech Governor Carney made clear:

“In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year [2015].”

So be warned. And thus Carney put a cap on growth in the UK in the 2nd half of 2015. Thanks for that.

How to avoid sunburn, or the sorry state of UK monetary policy

A James Alexander post

When Mark Carney was appointed Governor of the Bank of England back in 2012 hopes were high. The Bank of England was mired in failure. For Market Monetarists it had a poorly understood monetary policy that could and should have been more proactive in 2007-2009 that directly led to the UK’s experience of the Global Financial Crisis being so much worse than most other countries. Whatever the cause, the BoE had totally failed to ensure financial stability. Somewhat surprisingly, it actually got more powers as a result of the crisis rather than less. Perhaps the price of gaining more power was that an outsider had to be appointed Governor to reform the Bank.

Carney certainly started with a bang. He made his famous speech on Guidance in late 2012 while still basking in the glow of being Governor of the very well-regarded Bank of Canada. The Canadian central bank had had a good crisis, although this was not really much to do with Carney who had been appointed only in February 2008. While he acted as a decent firefighter, drawing on his time in investment banking, the principles of flexible inflation targeting and tight banking regulation had been established for a couple of decades.

Much new blood has since been brought on board and there has been a major internal shake up. But has anything really changed? Not by the evidence of this woeful article by one of Carney’s new faces Kristin Forbes.

“As the summer holiday season begins and the date of an interest rate increase draws nearer, this is a good time to remember the importance of timing.

With both sunshine and inflation, there is a peril to living only in the moment. One should plan for the future – especially if precautionary actions take time to be effective. But it is also important to monitor last-minute changes in the weather forecast – or in the economic outlook – and adjust your plans accordingly.

We all know the enjoyment of that first day on holiday. It is tempting to stay outside all day – whether you prefer to doze, read a good book, or go for a swim or for a long run. But linger too long in the sun and your skin may take on a slightly pink glow.

While you probably won’t want to move from your comfortable spot in the sun, if you ignore the warning signs you may have a painful sunburn that evening. Yes – you can treat the sunburn, but it might spoil the rest of your holiday. Better to take preventive action.”

Is there where the level of monetary economics has got to at the Bank of England? Maybe the elite macro specialists on the MPC have to dumb down to get their point across to the readers of the Daily Telegraph but this is ridiculous. Ridiculous and wrong.

Wrong because the BoE appears to have learnt nothing from Japan’s decades of failed monetary policy. Creating a 2% ceiling and constantly threatening to raise rates any time there is the faintest whiff of prices rising ensures you will never come close to the 2% target. The market automatically tightens policy with its reaction to “good” economic news by raising short term rate expectations and by buying the currency. This tightening slows the nominal economy. “Bad” news then becomes good from prospective loosening of policy – the currency weakens and short term rate expectations fall back. Repeat.

These rapid market reactions show that Forbes is just wrong about lags. It is very tired, old school, thinking indeed:

“But unfortunately monetary policy works with lags much longer than a sunburn affects your skin. An increase in interest rates is generally believed to take somewhere from one to two years to have its maximum impact. Maintaining interest rates at the current low levels during an expansion risks creating distortions.”

Wrong because the underlying concept of “full capacity” causing inflation has been falsified for many years. Monetary policy causes inflation, or rather, nominal growth, not full employment. It is perfectly possible to have full employment without inflation. The long-run Phillips Curve is vertical – the somewhat painful lesson of the 1970s stagflation. At very low levels of inflation the Phillips Curve does, in the short-run, well, curve, due to downwardly sticky wages.

Wrong because even on their own terms of Inflation Targeting UK inflation is dead in the water. Forbes’ claim this is simply false

“Much of the weakness in core inflation can be explained by low energy prices and sterling’s strength, suggesting that core inflation should begin to recover from current low levels as last year’s sharp fall in energy prices rolls off.”

The Daily Telegraph helpfully supplies some charts in its article reporting on Forbes’ comments showing exactly what is going on with inflation.

Wrong because there is so little evidence presented for the damage to the economy from waiting too long. it is just asserted continually by hawks regardless of the dangers in acting too soon, a much bigger issue as the ECB so painfully found out in 2011 when it caused the second leg of the Eurozone crisis via the two rate rises.

“Therefore, interest rates will need to be increased well before inflation hits our 2pc target. Waiting too long would risk undermining the recovery – especially if interest rates then need to be increased faster than the gradual path which we expect.”

The phrase “well before” tightened policy the moment it was read, judging by the moves in Sterling overnight. It is scary that our MPC members can be so irresponsible.

Of course, she also raises the bogeyman of wage-push inflation still surprisingly current in central bank circles by worrying about wage growth. This stance is especially cruel on the mass of the population as it will ensure no real wage growth over the medium term, and probably no falls in inequality as it seems that the low paid suffer more from a weak labour market than the higher paid. The current modest uptick in wage growth to something still below the good but not great growth rate of the Noughties is something to be nourished not crushed, The danger the MPC seems oblivious to is that even talk about crushing it will kill it.

All these common mistakes seem to flow from the addiction to Inflation Targeting. Ultra-low inflation is not and never should be an end in itself. Prosperity is the end we all should seek. If ultra-low inflation conflicts with prosperity then the Inflation Target should be ditched. To be fair to Forbes she is mostly parroting Carney – more shame on him!