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WSJ: The UK's Surprising Resilience
inspector_monkfish
Posts: 9,276 Forumite
23:30 07Oct10 - WSJ: The UK's Surprising Resilience
These are anxious times in the U.K. House prices plunged 3.6% in September, the biggest monthly decline 27 years, according to Halifax. The government is about to set out the toughest public-spending cuts in 60 years, involving an estimated 600,000 public-sector job cuts. Such employees have also been warned to expect rising pension contributions.
Bank of England Monetary Policy Committee member Adam Posen has argued for more quantitative easing, as looks increasingly likely in the U.S. He wants to pre-empt an economic slowdown, which could lead to spare capacity in the economy becoming obsolete as skills are lost. Even though the committee voted Thursday to leave policy unchanged, pressure to ease further looks set to increase.
That looks misguided. It is a mistake to attach much significance to one month's house prices, particularly when transaction volumes are low and the data, therefore, more volatile. A survey by lender Nationwide, which showed prices falling in July and August, actually registered a small rise in September. While the housing market is softening, weakness largely reflects increased supply, which may indicate sellers are more confident. Even if prices keep falling, that isn't necessarily bad as lower prices could encourage more transaction volumes and related consumer spending. And monetary policy shouldn't be set on the basis of changes in the price of a single asset class.
The real issue is the surprising strength of the economy. Nominal gross-domestic-product growth is likely to top 6% this quarter, nearly 3.5 percentage points above the BOE's forecast a year ago. Much of that is inflation. At 3%, it is nearly two percentage points higher than expected.
True, the inflation spike may prove fleeting as the impact of sterling depreciation and higher value-added taxes pass through. Bank lending also remains weak, although likely more down to sluggish demand than supply.
But retail sales are rising, and the savings rate has fallen to 3%. Unlike the U.S., the U.K. is also creating jobs, at a pace equivalent to U.S. nonfarm-payroll growth of 650,000 for each of the past four months, argues Goldman Sachs.
This is happening in the midst of a fiscal tightening that has helped cut the primary deficit by three percentage points this year. That suggests the economy can weather further cuts.
In the U.S., policy makers are trying to create inflation. On the face of it, U.K. conditions seem more aligned to eventual policy tightening rather than further quantitative easing. The Federal Reserve may be loading for another bout of easing, but until the BOE committee has clear evidence the recovery is faltering, it should hold fire.
These are anxious times in the U.K. House prices plunged 3.6% in September, the biggest monthly decline 27 years, according to Halifax. The government is about to set out the toughest public-spending cuts in 60 years, involving an estimated 600,000 public-sector job cuts. Such employees have also been warned to expect rising pension contributions.
Bank of England Monetary Policy Committee member Adam Posen has argued for more quantitative easing, as looks increasingly likely in the U.S. He wants to pre-empt an economic slowdown, which could lead to spare capacity in the economy becoming obsolete as skills are lost. Even though the committee voted Thursday to leave policy unchanged, pressure to ease further looks set to increase.
That looks misguided. It is a mistake to attach much significance to one month's house prices, particularly when transaction volumes are low and the data, therefore, more volatile. A survey by lender Nationwide, which showed prices falling in July and August, actually registered a small rise in September. While the housing market is softening, weakness largely reflects increased supply, which may indicate sellers are more confident. Even if prices keep falling, that isn't necessarily bad as lower prices could encourage more transaction volumes and related consumer spending. And monetary policy shouldn't be set on the basis of changes in the price of a single asset class.
The real issue is the surprising strength of the economy. Nominal gross-domestic-product growth is likely to top 6% this quarter, nearly 3.5 percentage points above the BOE's forecast a year ago. Much of that is inflation. At 3%, it is nearly two percentage points higher than expected.
True, the inflation spike may prove fleeting as the impact of sterling depreciation and higher value-added taxes pass through. Bank lending also remains weak, although likely more down to sluggish demand than supply.
But retail sales are rising, and the savings rate has fallen to 3%. Unlike the U.S., the U.K. is also creating jobs, at a pace equivalent to U.S. nonfarm-payroll growth of 650,000 for each of the past four months, argues Goldman Sachs.
This is happening in the midst of a fiscal tightening that has helped cut the primary deficit by three percentage points this year. That suggests the economy can weather further cuts.
In the U.S., policy makers are trying to create inflation. On the face of it, U.K. conditions seem more aligned to eventual policy tightening rather than further quantitative easing. The Federal Reserve may be loading for another bout of easing, but until the BOE committee has clear evidence the recovery is faltering, it should hold fire.
Please take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
(MSE Andrea says ok!)
(MSE Andrea says ok!)
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Comments
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A strange article, GDP 6% presumably Q3 annualisd 1.5%, and fiscal tightening, I am not sure they have done much of that yet, cut the deficit by 3% what does that mean?'Just think for a moment what a prospect that is. A single market without barriers visible or invisible giving you direct and unhindered access to the purchasing power of over 300 million of the worlds wealthiest and most prosperous people' Margaret Thatcher0
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A strange article, GDP 6% presumably Q3 annualisd 1.5%, and fiscal tightening, I am not sure they have done much of that yet, cut the deficit by 3% what does that mean?
Lord knows!
Good to have the Inspector & his threads back though innit?:DIt's getting harder & harder to keep the government in the manner to which they have become accustomed.0 -
I thought nominal gdp was adjusted for inflation?
Interesting article, maybe we arent doomed after all.0 -
ruggedtoast wrote: »I thought nominal gdp was adjusted for inflation?
No. The figure that usually gets all the publicity and discussion is, the "nominal" is the obscure non-inflation adjusted figure. I suppose the article uses it just to make a point about growth and inflation.0 -
ruggedtoast wrote: »I thought nominal gdp was adjusted for inflation?
Interesting article, maybe we arent doomed after all.
There are 2 things:
- Change in GDP/GDP Growth. This is always adjusted for inflation using something called the GDP deflator which tries to adjust changes in the cash value of output into changes in output.
- Change in the cash value of GDP (nominal GDP). This is essentially meaningless and this is the first time I have ever seen it referred to except in textbooks making a point about how dumb it is to use nominal GDP.
It is an interesting article though, I agree.0 -
Thanks
Surely in relation to a discussion about further QE nominal GDP is indeed the metric to look at?There are 2 things:
- Change in GDP/GDP Growth. This is always adjusted for inflation using something called the GDP deflator which tries to adjust changes in the cash value of output into changes in output.
- Change in the cash value of GDP (nominal GDP). This is essentially meaningless and this is the first time I have ever seen it referred to except in textbooks making a point about how dumb it is to use nominal GDP.
It is an interesting article though, I agree.I think....0 -
Does anyone else think it's rather strange to think the savings rate falling to 3% is the sign of a good economy?“The ideas of debtor and creditor as to what constitutes a good time never coincide.”
― P.G. Wodehouse, Love Among the Chickens0 -
Does anyone else think it's rather strange to think the savings rate falling to 3% is the sign of a good economy?
No, because it means we are avoiding the negative outcomes outlined by Keynes in the paradox of thrift.
And as experienced by Japan.....“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”0 -
But the paradox of thrift applies fundamentally to excessive saving. a 3% rate is far below the long term average for the UK economy, and in the long term saving too little is in my view dangerous, because it lays the foundation for a banking crises.“The ideas of debtor and creditor as to what constitutes a good time never coincide.”
― P.G. Wodehouse, Love Among the Chickens0
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