In the spirit of the season, I thought I’d do my own Mid-Term Review and not keep it secret.
Back on the 14th November 2012, I wrote a piece for LDV on how Shinzo Abe, the clear favourite to become Japan’s next PM, was telling the Bank of Japan to deliver 3% growth in the money measure of GDP (NGDP) on pain of having its independence withdrawn. NGDP in Japan had been virtually static for twenty years – a sort of Great Stagnoflation.
How’s Mr Abe doing just eight weeks on? Well, he’s Prime Minister, he’s told the Bank of Japan to boost NGDP by 3% and the Nikkei 225 has risen 20%, when the FTSE has risen 6%.
My campaign to get the Liberal Democrats to embrace NGDP level targeting has not had an easy ride here on LDV. More helpfully, the new Governor of the Bank of England, Mark Carney, gave a hint that he might advocate its adoption when he takes up his post in June – giving the policy a huge dose of creditability. But the big news today, as reported by the ever reliable Britmouse, is that the Old Lady of Threadneedle Street may well have become a secret admirer of an ambitious NGDP target herself.
As Britmouse reports, the 2012 Quarter 3 figures for NGDP growth are out. And they are no less than sensational.
At an annualised rate, NGDP is up 7%. Yes, aggregate demand has risen by 1.75% in three months. Now, my long standing critics will be saying, ‘That’ll all be inflation!’ Well it isn’t. In fact it looks as if fully 1% is real growth and only 0.75% is inflation. All those doom-and-gloom nay-sayers and zombie watchers who said recovery by monetary stimulus would be held back by the supply side (Vince Cable has been busy fixing that), that any boost in demand would just increase inflation and that getting the deficit down was the priority were wrong.
The UK does have the capacity to grow strongly this year and for a second year at 4% real if we continue to target NGDP growth of 7%, providing the inflation hawks at the Bank and in the media don’t pull on the handbrake at this first sign of recovery. The performance of the economy in 2012Q3 also suggests that the greater component of the deficit is cyclical and will be eliminated by recovery.
Of course, it also means that the Office for Budget Irresponsibility got it wrong last month on the output gap just as I predicted it would back in October when I warned ‘Mind that Gap!’. Underestimating the output gap, the OBP has exaggerated the size of the structural deficit. By accepting that estimate without reference to the growth figures, the Quad earmarked an extra £65 billion of cuts over the next five years to make good the difference.
I predict that a future review will prove those cuts were unnecessary and unhelpful to recovery.
2013 – Bring it On.
BREAKING NEWS: Overnight Mr Abe has launched a 10.3 trillion yen (£72 billion) stimulus package set to create 600,000 jobs and to boost the economy by 2%. The package will include infrastructure spending and incentives for firms to boost investment. The Nikkei has risen a further 1.4% on the news.
* Bill le Breton is a former Chair and President of ALDC and a member of the 1997 and 2001 General Election teams