“We’re not in recession”. Last July’s headline comes true (belatedly).

Four months ago, just after the last set of quarterly figures published by the ONS showed a sharp contraction in the UK economy, I highlighted economist Hamish McRae’s very public assertion that the UK was in actual fact no longer in recession. Pointing to the second-highest rate of job creation ever in the private sector, combined with falling inflation, he declared: ‘pull all the other data together and the figures would be consistent with an economy growing at around 1 per cent a year’.

Here’s what he has to say about the latest quarterly growth figures of +1.0%, which officially bring the double-dip recession to an end:

If you stand back and look at the UK economy as a whole, the broad picture that emerges is one of very slow growth, maybe 1 per cent a year. In any terms that is disappointing, way below its long-term underlying growth rate of 2-2.5 per cent, and particularly disappointing given the ground lost since the last peak. The economy are still officially more than 3 per cent smaller than it was in the first part of 2008. There is a long way to go.

Looking ahead there are both positive and negative signs. Among the positive are lower inflation, with the possibility that inflation might fall below nominal wage growth early next year. At the moment it is still a little above it. That would mean that real wages, the chief determinant of living standards, should start to rise again. We would, for the first time for about four years, start to feel a little richer. Consumers are already rather more confident than they have been for several years and, to take a snap-shot of the biggest consumer purchase, the UK is the only big car market in Europe, where sales are up rather than down. …

So meanwhile the thing that will keep the economy moving forward will be domestic demand. These latest GDP numbers show particularly strong growth in our service industries and that is encouraging. But consumers remain strapped for cash. We are long way from moving the economy from its present slow walk to a brisk trot, let alone a canter.

Hamish McRae’s estimate of 1% annual growth is backed up by Jonathan Jones’s estimate for The Spectator’s Coffee House blog here that the real growth rate this quarter was — once you’ve stripped out last quarter’s exaggerated slump and the one-off boost this quarter of the Olympics — about 0.3%.

In the circumstances, then, Nick Clegg’s pre-response to the news seems to get the tone about right — Nick Clegg warns of ‘slow and fitful’ economic recovery:

“There’s a lot of speculation about what the GDP figures will bring. Whatever they look like, we know that, overall, we’ve set the economy on the right path. But recovery is slow and fitful. Repairing the damage following the shock in 2008 is a gradual healing process. And the government must remain absolutely focused on the reforms that will drive growth.”

* 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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  • I don’t understand why were Olympic ticket sales held back to this quarters figures?

    Surely that’s not the way our quarterly economy figures should be calculated?

    I thought the whole point of having quarterly GDP figures was so it could be judged what has been spent in the economy for that period.

    And why where the ONS so reluctant to comment on how much these “one off effects” impacted on the figures.

    Surely it could not have been that difficult to calculate , after all, we only have to have a weeks worth of cold weather and snow and they seem to know exactly what affect that had on the figures.

  • Peter Watson 25th Oct '12 - 9:31pm

    @matt “why were Olympic ticket sales held back to this quarters figures”
    I’m just guessing, but I assumed it was because of the possibility that the Olympics could have been cancelled and the monies refunded, so ticket sales could not be “banked” until after the event.

  • Matching is s basic principle of accounting. As Peter rightly says, you declare the revenue in the period the goods or services are delivered.

  • Richard Dean 25th Oct '12 - 11:17pm

    My company accountant would be more complicated.

    On the day that the money is received, it is added to “Cash in bank and at hand”. Simultaneously, it is also recorded in “Creditors due within one year”. These two items balance, giving no net effect on the overall company assets.

    On the day that the service is delivered, in this case the day that the olympic experience is experienced, the entry in “Creditors due within one year” is annulled, and the amount is added to “Turnover or Income”.

    The final effect is just as Tabman wrote, but my company accountant now asks “is it really right to treat the economy of the whole country in the same way as the ins and outs of a business?”. I wonder ….

  • Richard – it depends whether you want to treat economic reporting like a P&L or a cashflow statement. The former is a better indicator of long term financial health; the latter of short term financial health.

  • Richard Dean 26th Oct '12 - 12:46am

    My accountant was considering it in terms of P&L and Balance Sheet.

    She does say it’s more complex. First, there is work that is done prior to the delivery of the service to the customer, such as constructing the venues. All of this work comes under “Work in Progress” before the service is delivered, and is balanced in part by a reduction in Cash in bank (for the part that is paid for) and in part by Creditors. On delivery of the service, all this Work in progress gets moved to Cost of Goods or to Other Expenses.

    So what is GDP? If it is supposed to measure the work people do, then it’s actually equivalent to the sum of the Work in progress and Costs or Expenses. It’s not Turnover or Income at all. On this basis,, the value of the work done to prepare for the games should have been accounted for in the previous quarter. Only the part of the work done in the present quarter should have been accounted for in the present quarter.

    What I think the accountant is saying is that GDP is a rather approximate figure when measured over a short period like three months. It really only makes sense at time scales of a year or more. Put snother way, she seems to be saying we should trust this growth figure like we trust an eel to not slip out of our hands.

  • Richard – matt referred specifically to ticket sales; I’m not an economist so I’m not sure how GDP is calculated.

  • Olympic tickets were only 0.2% of the growth (and the Olympics took place in Q3 so convention (presumably not going back that far – at least to Sydney 2000 though) is to record them then.

    The major factor was not having a jubilee, which probably accounted for 0.5%.

  • Hamish McRae, one of the better economic commentators (if massively over optimistic – see his 2008 columns) likes to rely on the Goldman Sachs Current Activity Indicator as a measure of real GDP, rather than the ONS. This is it here (from Gavyn Davies’ column) http://blogs.r.ftdata.co.uk/gavyndavies/files/2012/10/ftblog322.gif

    Note that it shows no double-dip (unless you count the negative growth it indicates in Q3 2011) but it also shows economic growth has fallen from near 2% a year at the start of 2012 to less than 1%. now (annualised). So on this measure the economy is getting worse, not better.

  • ” it was more tourists coming the the UK whilst British tourists who might otherwise go abroad stayed here. All brought their spending power mainly to London, creating extra demand in the economy, which is what is needed. ”

    Except for all those reports that trade was down in London during the Olympics (which may or may not be either senstaionalised or inaccurate!)

    “So lets have more fiscal stimulus.”

    £9bn for 0.2% of growth isn’t an encouraging equation 🙂

  • Bill le Breton 26th Oct '12 - 10:21am

    Here’s a future???

    Lib Dems leave the Coalition summer 2014 (after Euro results). Party seeks fillip from 2014 Conference.

    Autumn statement 2014: Governor of the Bank of England, by then Adair Turner, announces cancellation of holdings of gilts (reducing debt:GDP); OBR increases its estimate for the output gap; Conservative Chancellor announces structural deficit has been eliminated and debt:GDP target reached which allows a package of fiscal easing. 2015 pre-election budget tax cuts. We vote against all these nasty and cynically political ploys.

    Or, we could sack the Governor of the Bank of England and put in Turner ourselves now. Implement NGDP level targeting (with expectation that the above monetary and fiscal easing supported by an up-beat communications campaign on economic revival led by sage Vince Cable and firm but fair Nick Clegg ). Leaving Labour flat footed, and perhaps gaining some credit and respect for so doing.

    Oh dear – day dreaming again 😉

  • Richard Dean 26th Oct '12 - 10:43am

    … or possibly we could come back down to earth and starting talking about realistic alternative solutions? … 🙂

  • Bill le Breton 26th Oct '12 - 10:45am

    Richard, you are such a bore. Isn’t the sun shining where you are?

  • Richard Dean 26th Oct '12 - 10:58am

    Thank you Bill. I remember the swinging sixties too, or I would if I could! 🙁

  • Bill le Breton 26th Oct '12 - 12:32pm

    I have just had a bonfire of the vanities, perhaps I enhaled.

  • Richard Dean 26th Oct '12 - 12:36pm

    So, why not have the discussion? Let’s start with a couple of points of reality …

    First. Lord Turner is certainly a candidate for the upcoming vacancy at the Band of England. So maybe he’s mainly saying things that make him look like a good candidate. Has he said he’d using NGDP targetting? Stefanie Flanders thinks he’s planning a helicopter drop instead. http://www.bbc.co.uk/news/business-19925013

    Second, the NGDP targetting option is recommended by some economists, but we already know that economists in general don’t understand economics in a real world – otherwise we’d not be in a mess – so why trust them now? A 5% growth in NGDP can be achieved by a 2% fall in real GDP coupled with a 7% inflation. And that 2% fall is definitely not good.

    Civil engineers stand ready to get this economy on the move again. We have highways to repair, railways to make, flood defences to construct, water networks to renew, hospitals and houses to build, gas pipelines to lay, sewers to upgrade, broadband to expand, and wind turbines to install. Let’s start taing about the real economy, not the economists’ imaginary one.

    Let the sun shine for a change!

  • Bill le Breton 26th Oct '12 - 3:01pm

    If my bonfire is ranging out of control, you are to blame!

    Scott Sumner has just published a great primer on NGDP targeting here: http://mercatus.org/publication/case-nominal-gdp-targeting

    Here is why a 4.5 NGDP level target won’t lead to 2% contraction in the real economy and 6.5% inflation:

    The UK long term growth rate is 2.5% – we are not achieving that at the moment because of insufficient aggregate demand underpinned by expectations generated as a result of the present policy framework (fiscal and monetary policy) and concerns about future income.

    Say NGDP is presently around 3% (of which 2.2% inflation).

    Tomorrow, the Coalition tells firms that the Bank of England will conduct unconventional monetary easing until that figure for NGDP rises to 4.5%, a 1.5% rise and says so with concerted conviction pledging unconventional monetary policy.

    Firms will ‘know’ that aggregate demand will rise by 5% next year. Individually they are not concerned about how this is made up and will gear up accordingly, restock, pull out those old development plans, launch a marketing drive, maybe even risk a buying a new machine or two.

    Real growth will increase. Pressure may mount to raise prices, even wages. But if firms know that increases in prices and wages will risk NGDP rising by more than 5% and fear the subsequent increase in interest rates they will hold fast.
    Keeping a close look at Index Linked Gilts (and maybe even a market for NGDP futures) the monetary authority sets its policy to keep expectations for future NGDP at 4.5% which is most likely to be 2.5% growth (long term trend) and 2% inflation.

    OK. Then sometime in the future if we have an oil price spike. Instead of reacting to that under an inflation targeting regime by increasing rates (or failing to lower them as in 2008) there is no change to policy. NGDP rises above 4.5% to say 5.5%. The level target rule means that the Monetary Authority has to bring that figure back to a compensating 3.5% in the following year (ie by as much under as it was over the previous year). Firms and individuals will expect this and reduce investment decisions in advance.

    The system is self correcting because of these expectations. 2.5% growth each year + 2% inflation rebalances the economy/debt:GDP/gets us back to long term trend on employment/unemployment.

    Back to Turner – he gave the Lionel Robbins Lectures at the LSE two years ago which can be found here, here and here. They are the best piece of Liberal Democrat economic policy development that I know.

    But on monetary policy and deleveraging here is his thinking, a year ago, with its emphasis on the importance of nominal GDP. He reaches three conclusions

    • Private leverage and bank maturity transformation has to be constrained by capital and liquidity standards far higher than those which had developed pre-crisis. We must not divert from the Basel III reforms. And we need powerful macro-prudential levers to contain credit and asset price cycles.

    • The Eurozone architecture needs to combine tight political and market discipline of subsidiary sovereign debt with the creation of Eurobonds, and with an acceptance that if necessary the ECB can conduct quantitative easing operations at the Eurozone aggregate level.

    • Aggregate demand has to be maintained, and if necessary should be via the ultimate tool of central bank debt monetisation. And central bank radicalism in monetary policy is a preferable way to maintain aggregate nominal demand than devices which delay the application of prudential standards, since these will only maintain nominal demand at the expense of also maintaining dangerously high leverage.

    That last sentence says it all! Sorry it took so long to get to it.

  • Richard Dean 26th Oct '12 - 4:07pm

    Bill, thanks a million, I seem to glimpse the temptation which NGDP offers, and why people have succumbed to it.

    The apparent assumption is that, knowing what NGDP will be next year, firms will invest to produce more. But what is stopping them from simply raising prices by the planned rise in NGDP? Not competition – that happens already. Raising prices would be their easiest option, and might be perceived as their least risky one, particularly if banks misbehave. It would produce zero growth, coupled with inflation at the target NGDP level. And then there would be wage rises so that workers can compensate. No-one would end up any better off, and thise with fixed incomes would be worse off.

    A deeper assumption is that firms perform best, and grow better, in conditions in which the future has more certainty compared to conditions of less certainty. I bet there’s a risk-return knot in there somewhere that messes things up, I;ll add a comment later f I can find it (after reading the references you kindly provided). Communism shows that certainty doesn’t work at all. In Russia farmers once used to let their tractors rust in the Siberian winters, because they knew for certain that the government would provide new tractors next year! Production, but not growth.

    But certainly your explanation is helpful and worth thinking more deeply about, while watching out for temptations! Please keep burning, but stay alive!

  • Bill, alternatively firms could just put up prices by 5% if they know it is going to be validated by government if they do.

    NGDP as a concept ignores supply side inflation, which is a large part of what we are suffering at the moment, through oil, food and other commodity prices. We have no control over this, as the past two years have shown very clearly.

    The economy just doesn’t work in the way you are saying it does. This 2.5% trend rate is simply an ex-post observation, it is not an immutable rule about what is going to happen in future. So this whole NGDP management concept is flawed from the start. Keynesians thought they could fine tune the economy like this in the 1960s, but it turned out to be hogwash.

  • Bill le Breton 26th Oct '12 - 6:43pm

    RC, you do business in a very strange economy where there is either one very large firm or a universal cartel and an extraordinary s-r aggregate supply curve.

    The trouble you describe comes precisely from targeting inflation rather than NGDP. Under an inflation target regime, the monetary authority has to react to a rise in (say) oil prices by tightening enough to lower the prices of all non oil prices (to keep on target). Result: either lower wages or, if these are sticky, higher unemployment.

    Sure, there are supply side matters to sort out but these are done more easily in an economy with a stable rate of increase in aggregate demand (NGDP). Japanese culture may be able to remain relatively cohesive with 20 years of zero growth and an aging population. Are you so sure, we could cope with that? It was deflation that brought forward Mussolini, Franco and Hitler. It is deflation that is bring forward Golden Dawn.

    The Great Moderation saw growth in the UK circa 2.5%. Perhaps some capacity has been permanently destroyed in the last four years, but there is no reason why Parliament could not decide after a few years that the level target should be slightly.

    The important gain is stability and predictability. It is also rule based. We can dismiss the MPC. There is no fine tuning involved. The Bank merely sets the level of nominal income at a stable level. For democrats, Parliament could decide that. For meritocrats, a team of technocrats could do it. Take your choice.

  • Richard Dean 26th Oct '12 - 7:42pm


    I have briefly skimmed the first document you linked to, by Scott Sumner. On page 12, Sumner writes that “NGDP targeting is NOT (my capitals) a way to boost [long-term] growth”. So I am wondering why you conclude that NGDP targeting is what is needed now?

    Most of the subsequent argument seems to be about supply shocks, such as a sudden rise in the price of oil, and how NGDP targeting can help avoid some of the consequent disruption. Linked to this, it seems, there is an argument (page 20) that “NGDP targeting provides the best environment for free market policies to flourish”. Are you saying that the present difficulties are the result of supply shocks?

    I thank you for the lesson, but maybe I’ve just completely misunderstood? I will see if I can understand Turner later or tomorrow.

  • Bill le Breton 26th Oct '12 - 8:17pm

    Sumner is referring to the supply side shock of oil price rises and fear of inflation which made monetary authorities reluctant to drop interest rates even as NGDP plunged (in 2008). Remember that it took six months after Lehmans’ for the Bank of England and others to cut rates. While they dithered NGDP fell 8% in the UK. Deflationary expectations were truly set in by the time we got to the so called zero lower bound of 0.5% policy rates. and NGDP growth has been pitiful ever since. If the price rise of oil or say VAT is a one off and does not result in wage inflation why deflate?

    There are some great diagrams around to show that the falls in NGDP occurred after and not at the time of nor the result of the US housing crisis. It was over tight monetary policy.

    The monetarists argue that if you double the money supply you may in the long run double the price level, but in the short run it leads to stimulus that can increase output. So Sumner will be saying that it boosts short term growth – back onto the old track for NGDP growth, at which point the say 4.5% target keeps growth stable at say + 2.5% with inflation at 2%. The increase in M leads to a balancing increase in the T in Y=PT. Once back on the growth path, you just keep things steady with any shock (eg oil rise increasing NGDP or an efficiency from a new tech reducing it being levelled up the the following period).

  • Richard Dean 27th Oct '12 - 2:33am


    Thanks for your second link, to Adair Turner’s speech. Adair seems like a very clever chap, but I think he makes an error. He starts with a valuable analysis of debt. He sees that we must stop worrying only about inflation: logic and history show that economies get out of debt by achieving real growth at the same time as moderate inflation. So he is saying we need to control two things, which are

    > real growth
    > inflation

    He then makes the elementary mistake of assuming we can do this by controlling just one thing

    > real growth plus inflation

    But as RC observed and me too, if you only control this one thing, industry still has a choice of how much real growth there will be. A 5% NGDP target can be achieved in many ways, one of which is no growth and 5% inflation. And it is entirely feasible that this may be the least risky option for firms.

    There are other issues too. Can every firm or every country do this simultaneously, or will the savings trap close? And can NGDP actually be controlled well enough, given that (as we know from the constant revisions by the ONS and OBR) accurate NGDP numbers are not available on the same timeacale as the rapid day-to-day decisions needed to implement a monetary policy?

    But the crux of the matter is that if you want to control two independent things – real growth and inflation – then you have to two levers to pull. NGDP targeting is only one lever.

  • Richard Dean 27th Oct '12 - 1:08pm

    Bill, Thanks for your comment on comment on Sumner. I have a long plane journey to endure on Monday, and will try read Sumner and Turner in more detail on it. Perhaps Sumner does, as you suggest, discuss using NGDP to stimulate short term growth. Perhaps I missed it first time through.

    Sumner and/or Turner seem to suggest that there is extensive data showing that NGDP responds to various shocks. I am sure it responds to monetary policy too.

    But this does not seem to imply the reverse, that controlling NGDP is a way of controlling other effects of shocks or policy. Nor does it seem to imply that a single lever can control two effects – real growth and inflation.

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