Hamish McRae, an economist and associate editor of The Independent, has been claiming for some while now that the official figures aren’t reflecting the reality of the economy. A week ago, he made the bold statement that the UK is not in recession:
The British economy is becoming more and more interesting. This week [ie, last week now] we have had two positive surprises … the fall in inflation to 2.4 per cent, a much sharper decline than expected, with the prospect that it may be below 2 per cent by the autumn … [and] a further fall in unemployment on the International Labour Organisation measure, down to 8.1 per cent, and a rise in employment of 181,000 on the quarter. … it is this second surprise, on the labour market, that is really exciting because it is one more nail in the coffin to the idea that the economy is in recession.
Anticipating yesterday’s announcement of this past quarter’s shock 0.7% economic contraction, he added: “GDP figures are among the most nebulous [figures]. Beware next week when the second-quarter figures come out.”
Hamish McRae returns to the fray today, and he’s not recanting his view that the British economy is growing, albeit feebly. In fact he remains just as bullish that the GDP figures are failing to tell the true story:
Yet another implausible set of GDP figures underlines the point that the country needs as a high priority to examine what has been going wrong at the Office for National Statistics. To have headlines declaring that the economy had shrunk by 0.7 per cent in the three months to end-June was, in the yah-boo of politics, embarrassing for the coalition. But this should not be a party-political issue. The previous government suffered equally when the ONS got the timing of the exit from recession wrong, initially saying we were still in recession when actually we had, like most other countries, returned to growth. If it is childish for politicians to use dodgy data for political ends, it is intolerable for the country as a whole to have statistics of this quality. …
… in the three months to end-April, the private sector added a net 205,000 jobs, the second-highest rate of job creation ever. This is not, as you can see from the graph [click to enlarge], consistent with a shrinking economy. We are getting close to the peak in employment at the top of the last cycle, though officially the economy is some 4.5 per cent smaller. As Chris Wilkinson of Markit points out, if the official figures of GDP were correct the UK economy would be shrinking faster than Spain’s. Not even the most unutterably dismal economist could think that is the case.
It is perfectly possible that there might have been one quarter of negative growth over the past year and this may be it. But pull all the other data together and the figures would be consistent with an economy growing at around 1 per cent a year. That would be disappointingly slow. But I suppose it is understandable given what is happening across the Channel and given the debts households have to pay off. The latest banking figures confirm people are still doing that.
Not surprisingly, no Coalition politician is daring to make the case Hamish Mcrae is — either because they don’t believe it themselves, or perhaps because they know disputing the figures runs the high risk of being painted as a recession-denier. As The Economist’s Janan Ganesh tweeted yesterday:
Government in a bind. Many of them think the GDP numbers are way off the mark but know they’d look silly if they challenge them.
— Janan Ganesh (@JananGanesh) July 25, 2012
Is Hamish McRae right? I have no idea — as Will Rogers once remarked, “An economist’s guess is liable to be as good as anybody else’s.”
* Stephen was Editor (and Co-Editor) of Liberal Democrat Voice from 2007 to 2015, and writes at The Collected Stephen Tall.
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18 Comments
McRae’s a good journalist/economist and clearly there is some divergent data. But he always tend to the optimistic, and sometimes overoptimistic – in 2008 he declared (on similar grounds – employment data ) the economy was growing by 2% when it was plunging by nearly 4%,
I believe the simple truth about the UK economy is that it’s in a hell of a mess. Period.
Hmmmm
2.6 million unemployed is bad, particularly when the young are worse affected. And if the net addition over 2 years is only 400,000 jobs, there is an awful long time yet before things are ok.
30 years ago, a figure of 2 million was regarded as terrifying high in the UK. Do we want to complacently wait to attain Spain’s present rates? – 25% generally and 50% youth unemployment?
Thanks for flagging this up, Stephen. An interesting point.
I’ve heard this argument before and it’s interesting. But the fact is that by the measurements we use, we are in recession and it really is that simple. The recession in Japan did not lead to mass unemployment, it was still a recession,. This is because the definition of arecession is based on GDP not unemployment figures. You could technically have rising unemployment and rising GDP at the same time,, but it would not qualify as a recession,
How many of these jobs are ‘part-time’? The ‘Guardian’ noted that in February only 52%, of jobs advertised, could be verified as long-term vacancies offering enough hours to meet the new government definition of “work” for a typical family. That means that many families are falling foul of the changes to tax-credits , etc.
It isn’t just debts; it’s an increasing proportion of the public earning/spending less.
It is difficult to understand what is to be achieved by denial or publicizing the denial of others.
Here is a Press Release dated 1st June announcing ‘UK Manufacturing PMI slumps to three-year low in May’
http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9618
No doubt a series of these could be produced to show the fate of construction, services etc al. during this period.
The economy is at best stagnant and probably in retreat. The medium term forecast for inflation is well under the 2% target. Funding for Lending will be welcome, but although necessary it is nowhere near sufficient.
I guess that the Quad and their advisers (formal and informal) know that they will have very soon to link fiscal stimulus with the relaxation of the monetary policy target, but are too scared of what the reaction will be from the markets and from the Westminster village.
When they finally pluck up the courage I think they will be surprised at the reaction of the markets, but not by the reaction of the commentariat and their fellow politico.
Delay is political vanity. Every day of delay costs us all dearly.
Here in Catalonia, one of the richest regions of Spain, the regional government has run out of money. Staff in some hospitals will not be paid their salaries this month. This is what is coming to the UK unless something along the lines suggested by Bill is not done soon.
The key point here – the one which needs to be repeated loudly and often until people start taking it seriously – is that GDP is profoundly bogus and pretty nearly everybody agrees on this.
We need to stop using GDP as the golden measurement of the economy. It is actively harmful. There is a powerful incentive for governments to adopt measures which would rapidly boost GDP – and which would also be highly damaging to the economy, because GDP doesn’t distinguish between good things and bad things, it just counts up how many things happened.
(This doesn’t have anything to do with the current state of the economy, and I’ve been saying the same thing for a decade or more)
Could I add comments to what Richard Dean has written. In Madrid the bus fares in some cases have doubled. There is a lot of unemploymet to say the least. The property market has slumped. I had noticed just how cheaply I could now stay when I return to see my family. It has also been reported that in some areas the Ex.Pats are very keen to return to the UK because of the slump in the property market. A lot of the unemployed are young people. I feel very much for those in Greece too, we know there are some serious problems for those living there. I don’t think that there is anyone who could not feel sympathy for those in this situation. I must admit I do wish the situation could improve, it must be frightening to not know when this will happen.
So Andrew, whilst I agree that GDP is problematic in many ways, what measure would you use?
Lots of work has been done over quite a few years on replacements for GDP, taking a wider (environmental, social etc ) view than “just counting”‘ but no-one has yet agreed and implemented such results. It is time to move with this, or we will constantly be seeking the wrong solutions.
What worries me most about this debate is my fear that both sides are wrong.
Clearly the austerity merchants, the hair-shirt economists, the snake oil peddlers of “expansionary fiscal deflation”, the people whose idea of a holiday is to drink themselves silly on a Russian oligarch’s yacht while despairing British young people run riot – They’re wrong.
However, what about the serious Keynesian economists, the Will Huttons, the Cables, the Krugnans – could they, albeit in a rather less cavalier and culpable way, be equally wrong?
Growth would be a great solution, if the globe was infinite, if growth just meant charging off into unknown lands to colonise new territory. Keynesian economics implicitly assumes that this is the case – as, in the past, it has been. But, what if there are ecological limits to growth?
We have been pump-priming, advertising, creating artificial markets, promoting retail therapy, hysterically pushing the “growth” solution, for decades. It has dangerously run down the Earth’s resources, and it has run out of steam.
What do we try next?
“What the world needs now”, as they say, is stable Aggregate Demand – and at a level that uses the capacity of the economy.
That has happened over long periods in recent times – The Great Moderation.
Aggregate Demand = Nominal Gross Domestic Product. (Andrew is right to question the use of RGDP but don’t throw the baby out with the bath water.) Target a figure that includes the real and the money value.
During those periods of stable NGDP, economies in the West had seen NGDP grow at approximately 5% – made from 3% growth and 2% inflation.
So, we need Government and our Central Bank to target 5% NGDP growth and to practice what is known as level targeting at 5% i.e. if NGDP falls below 5% in a period Gov + CB loosen fiscal and monetary policy until 5% is regained and the opposite when 5% is exceeded.
At present we have NGDP of approximately 2% or less, so convincing the markets and the public that Gov and CB will loosen until 5% is regained will get things moving again. Note, ‘convincing the markets and the public’. Expectations + this communications policy might carry much of the lifting.
This practice is not possible when a) the CB is restrained to hit a 2% inflation target (when any fiscal stimulus by Gov or external inflationary stimulus is offset by tightening by the CB to maintain the target), and b) when our CB and (until yesterday) the ECB and (continuing) the Fed are actively trying to reduce inflation (disinflation) to figures lower than 2%.
That is dare I say the ‘third way’, David, which is neither austerity, nor so-called Keynesianism.
This would be an innovative and distinctive policy for the Quad – fir us, the Liberal Democrats. Cable is temped by it. It is too ‘modern’ for old school economist Laws. Together this personal chemistry ensures that Clegg and his advisers are opposed.
This is the most important change in policy required here and (as the UK did in 2008), we should be leading the argument on the world stage.
It’s no good if you accurately control NGDP at 5% and you’ve let inflation go to 10%. Real GDP is what creates wealth. So a better strategy is to work out what real GDP you want to achieve, then work out what money supply is needed to support that real GDP, then provide that money supply.
You also need to do the other things, innovate, equip, hire, adjust regulation maybe, get everyone working together, in order to achieve that ral GDP. It’s not jist a money supply issues. It’a coordinated effort . But whatever you do, don’t let a shortage of money stifle growth, and don’t let an excess of money create inflation.
There are several ways to measure GDP. One is to add up all the sales values of goods and services in the economy. Another way is to work it out from VAT receipts. A third way is to add up everyone’s incomes. GDP can go down, on the first and second ways of measuring it, if people slow down their purchases of things, even if GDP goes up on the third measure.
So the answer to the puzzle might be that firms have been expecting demand to go up, and so have taken people on , but demand has instead gone down. This looks bad; if demand continues going down we might find unemployment rising sharply in the next quarteror two.
I’d just like to add that I also think a concentration on GDP is problematic. Personally, I think one of the biggest real issues for the economy is personal debt. We’ve got into a cycle where we a terrified of wage inflation and at the same time frightened of a property crash and indeed expect year on year property value rises. The result is massive personal debt, which is why austerity doesn’t work. A lot of households have no room for further belt tightening. Either wages need to rise or prices need to fall. Both present big problems.
@ Bill le Breton
Can you point me to (or provide me with!) a primer on this targeting NGDP business? I really don’t get the point of it and I think I ought to have a go at understanding it…
I must say, I don’t see how targeting 5% growth (why 5%? Why not 4% or 6%?) can equate to stable aggregate demand, as you claim.