Why I am not a fan of nominal GDP targeting in the UK, I believe it will hurt the poor and defenceless

28th September 2012 by The Harried House Hunter

Yesterday whilst the focus was on the Spanish government and its new austerity plan there were some significant and interesting developments in the data released on the UK economy. However before I move on from Spain we have a new lesson from the Euro zone crisis. If a country has a pension reserve fund do not give politicians the option of raiding it! The value destruction that has been inflicted on the National Pension Reserve Fund in Ireland seems to be the likely model for what will happen as time goes by to Spanish pension reserve assets. Indeed the whole Spanish plan is looking rather Irish if we were to step back in time.

The UK’s Economic Growth Figures

I hope that regular readers were not taken in too much with the mainstream media’s -0.4% is better than -0.5% hurrah type spin. As I discussed on the  in my analysis of the flaws in Gross Domestic Product figures they are nowhere near that accurate. Indeed the progression from the originally released -0.7% to -0.4% may not be statistically siginificant either. Sorry but these numbers give us an idea of how we have done but the pressure for a spot number makes them seem much more accurate than they are.

Tucked away in the detail was something much more significant as it relates to a current economic debate. Let me give you the numbers first. In the second quarter of 2012 UK GDP rose by 4.1% in nominal times if we annualise it but the level of real GDP fell by 1.5% if we annualise that. So what you might think? Well if I tell you that the gap is a measure of inflation and on that basis it was running at an annualised 5.6% in the second quarter of 2012 I think you see what attracted my attention.

This inflation rate is the implied deflator or GDP deflator and as opposed to consumer inflation measures it covers a wider area as in theory the whole economy is covered. The official reading was 2.7% and this was up 1.1% on the previous quarter. So whichever way you look at it this inflation measure which is the widest we have showed an inflation pick-up in the second quarter of this year just as so many were telling us inflation was waning!

Nominal Gross Domestic Product Targeting

Economics does have fashions and this is one of the current ones which has become akin to a religious belief from some. This is that nominal GDP targeting by central banks can and should replace inflation targeting. A paper by Michael Woodford at the Jackson Hole economics conference has become influential.

An example of a suitable target criterion would be a commitment to return nominal GDP to the trend path that it had been on up until the fall of 2008. This would … make it clear that policy will have to remain looser in the near term than a purely forward-looking Taylor rule would imply

As you can see there is an implication here that policy should be even looser than it is now and Mr.Woodford goes on to tell us this in case you are wondering whose eyes lit up on reading this document.

At the same time, commitment to a nominal GDP target path by the central bank would increase the bang for the buck from fiscal stimulus

As you can see there would be some doing a jig reading this as a scholarly work apparently supports what they wanted all along. However to my mind there are implications here with which I can only completely disagree.

And the existence of the central bank’s declared nominal GDP target path should also limit the degree of alarm that might arise about risks of unbridled inflation when special fiscal stimulus measures are introduced.

This relies on the fact that central banks still have trust and credibility when they have spent the last 4 to 5 years eroding that. Also I can only completely disagree with the next bit.

For those who worry that fiscal stimulus always comes too late and goes too far, there would be the central bank’s commitment to revert to a policy of active control of aggregate demand through monetary policy once the nominal GDP target path is reached.

Again this relies on faith in central bankers that I simply do not have.

Just as a summary of the Woodford paper it is scholarly but has bits I agree with as for example he has doubts about the effectiveness of Quantitative Easing but some I completely disagree with of which the extreme is forward guidance by central banks on interest-rates. Mr.Woodford can write over 40 pages on this subject when I only need one word,otiose.

Nominal GDP targeting in practice

This is often expressed as aiming for 5% nominal GDP growth a year. But here is my point we were not far off that if we annualise the second quarter of this year and what did we get? Falling real GDP growth. And why did we get that? Because we have plenty of inflation the old UK bugbear.

As ever there is the danger of relying on one quarters numbers and I wish to remind readers of that even when they suit my case. But the underlying principle is that nominal GDP targeting has inflation risks and to my mind is likely to stoke it as we have ex ante no real way of stopping it. Or as a supporter of nominal GDP targeting Martin Wolf of the Financial Times puts it.

inflation might overshoot

The UK Trade Problem

Last week I tried to get Channel Four to ask the Governor of the Bank of England what happened to the “economic rebalancing” he promised and forecast after the depreciation of the value of the pound in 2007/08 of approximately 20%. Accordingly the latest numbers provided quite a bit of food for thought.

The United Kingdom’s (UK) current account deficit was £20.8 billion in the second quarter of 2012, up from a revised deficit of £15.4 billion in the previous quarter

Ouch! But actually if we put it this way it looks even worse.

The current account deficit equated to 5.4 per cent of GDP at current market prices in the second quarter of 2012, compared with 4.0 per cent in the previous quarter

If we consider that we were doing this with a shrinking economy there might be genuine fear as to what would happen if we were growing! Although this may well be for us an example of David Byrne’s “Same as it ever was”

The UK has run a combined current and capital account deficit in every year since 1997 and every quarter since the fourth quarter of 2009.

I have to confess that the way trade figures have been treated in my career is bemusing. It used to be that everyone waited for US and UK trade figures with baited breath and now no-one seems to care much at all! We have gone from one extreme to another. Let me nail my colours to the mast, they do matter but any analysis has the issue that the recorded numbers are often shockingly inaccurate.

UK Productivity is poor

This morning we have received the latest data on this front and it does not make for happy reading.

UK labour productivity fell by 0.9 per cent in the second quarter of 2012 on an output per hour basis.  Market sector productivity fell by 1.5 per cent on this basis, to its lowest level since 2005

Just to make a poor situation worse take a look at our costs.

Whole economy unit labour costs increased by 0.3 per cent in the second quarter and were 3.2 per cent higher than a year earlier.  Manufacturing unit wage costs increased by 4.0 per cent in the second quarter and were 5.7 per cent higher than a year earlier

No wonder we have a poor trade balance and negative to flat economic growth with numbers like that! Perhaps we also need a check on these numbers as they do not seem to coincide with the wages numbers that come with the unemployment report.


One way of looking at today’s analysis is to say that inflation issues,weak trade figures and poor productivity numbers could have been written at quite a few points of my career. In this instance deja vu is not welcome! Put another way it feels at times like the episode of Star Trek where Captain Jean-Luc Picard is trapped in a repeating loop.

However I hope that I have illustrated the danger of nominal GDP targeting. As even one of its supporters Martin Wolf admits inflation is an issue. They have no way of controlling the inflation – real growth mix  and frankly no certainty that there will be any real growth at all. Still at least they are not preparing the ground by attempting to emasculate our measures of inflation. Oh wait a minute!

So there is my conclusion for today and I will put it simply. They intend to inflate mate! The fact that such efforts have such a dreadful past record in the UK seems unlikely to deter them as they mutter to themselves another phrase with a dreadful track record. “This time it will be different”.

One of the reasons I think that this is wrong is that as we move from their theoretical calculations to the real world I fear that it is the poor and the weak who will end up being hurt the most by this.

22 thoughts on “Why I am not a fan of nominal GDP targeting in the UK, I believe it will hurt the poor and defenceless”

  1. Realfinney says:

    Hi Shaun, long time lurker, 1st time poster with today’s music reference from The Bloodhound gang:
    The trick is only pick on those that can’t do you no harm,
    like the drummer from death Lepparda only got one arm.

    1. Anonymous says:

      Hi Realfinney and welcome to the comments section
      I had never heard of the Bloodhound gang so this will be a job for You Tube or Spotify…

  2. Ln X says:

    Bingo Shawn, nominal GDP is a sham, what good is an inflated money supply without the demand to back it up? The rapid growth from the 70’s, 80’s, 90’s and up to the late 2000’s has been primarily inflation driven combined with an ever increasing money supply. Everyone only thinks they are richer because essentials of modern life (power, water, cars, computers, mobile phones) have become cheaper over the years. More like relatively cheaper when you consider inflation.

    Small wonder £100 in the 70’s equates to a few thousand pounds worth of purchasing power today!

  3. Drf says:

    “Let me nail my colours to the mast, they do matter but any analysis has
    the issue that the recorded numbers are often shockingly inaccurate.” Therein lies the nub of it all. The main reason the “recorded numbers” and all government statistics are now so shockingly inaccurate is of course because they are deliberately manipulated to attempt to show a different scenario from the truth!

    “So there is my conclusion for today and I will put it simply. They
    intend to inflate mate! The fact that such efforts have such a dreadful
    past record in the UK seems unlikely to deter them as they mutter to
    themselves another phrase with a dreadful track record. “This time it
    will be different”. ” Of course it will not except that it is going to be much worse than before! That is the result of Zimbabwe economics implemented by those who ought to know better.

    1. Anonymous says:

      Hi Drf
      There were a few inconsistencies in this data. For example we were told that real incomes had risen by 1.9% in the second quarter which does not fit well with the other data we get. For example real wages are falling and it doesnt seem likely there is more money/interest fron savings…..
      This bit does not sit well with it either.
      “In current price terms, compensation of employees rose by 0.2 per cent in the second quarter of 2012, revised down from a previously estimated increase of 1.2 per cent”

  4. Anonymous says:

    Nominal GDP targetting is a fraud. Real life is biology. Biology has feast and famine – it cannot be managed into a stable output. This translates into economics as boom and bust.

    Economies heavily influnced by commodities prices will see significant ups and downs. Bernie Madoff claimed to have beated economic volatility with his stable dividends ….

  5. DaveS says:

    Thanks Shaun – why don’t we see this kind of analysis in the mainstream press ?

    Wolf has infuriated me for years – I feel him and his cohorts share a lot of the blame for what is about to unfold – they have provided the academic fig leaf to this Madoff economy we have.

    The current account deficit tells the real truth – we simply have not been paying our way in the world – even with the benefits of North Sea oil and a massive boom in finance. We have maybe 8-10 good years of oil left and a badly damaged City of London – what will that do to our trade figures ?

    The trade figures were ignored because it didn’t matter – we could simply borrow the money to buy imports. Works great until the lenders decide very rationally that they probably won’t get their money back. Then what – we print and we inflate.

    But as you have pointed out, you can’t grow a consumer economy if real-incomes are dropping fast. It also means private debt is not being inflated away. They need to release wage inflation – I think nominal GDP targeting is code for that. Of course George & Mervyn can’t allow this, but Mervyn retires on his index linked pension next June and wage rises will be perfect for a new populist Labour chancellor. The heavens are aligning.

    It seems inevitable to me. The question is once we’ve emerged from bankruptcy what position will we have in the world. I read that China creates the equivalent of a Greek economy every 11 weeks – they add 1 million new vehicles to the road every month – on average (GDP per capita) they are still poorer than Bulgaria – 100’s of millions still live in poverty – what happens when they release their own population inflation and end the 1 child policy ?

    And China is just part of the story – the world is shifting.

    1. forbin says:

      Hello DaveS,

      totaly agree on the trade balance – we’ve coasted along with North Sea Oil and Gas and that period is drawing to a close

      We’re left buying oil and gas in the market place now – with not a large manufacturing sector to support us anymore.

      Finance is becoming a joke now – fortunately I think we have a little room left as the PIGS seems to pre-occupy the markets – The USA of ofcourse is still the defacto petrol currency for now.

      so what are we good at ?

      The clowns in Westminster seem intent on just throwing pies at each other these days instead leading the country….


      1. DaveS says:

        Well thats a good question Forbin – what are we good at ?

        Well world leaders in big ticket services – banking, insurance, law, architecture, education. Shame about the banking. And a lot of my foreign colleagues weren’t too happy with their UK university experience either – so they best be careful.

        Then I would list aerospace (Typhoon, Airbus wings, Rolls Royce engines). Trouble is Typhoon has been an export disaster – wrong plane at wrong time. Airbus is state supported success perhaps ?? Rolls Royce is one our blue chip companies for sure.

        Then oil/gas & its twin petrochemicals – not looking so bright for either of these.

        Pharmaceuticals – big ticket, but small employer – not many people needed on a pill production line. Given that half the universities can’t be bothered to teach Chemistry, then I wonder about its future. Seems labs are easy to move to far east.

        Shipbuilding – otherwise known as 2 totally useless nuclear carriers at £5bn a pop each and counting.

        Car manufacturing – a rare bright spot – Range Rover selling bucket loads to Chinese & Indians – not so sure domestic demand will hold up though.

        Alcohol and junk food – whisky is big export – rightly so.

        The classic consumption sectors – retail, construction, property, tourism.

        Then IT – Arm, Autonomy (unless HP kill it), can’t think of other leading software company (even though its my industry – Sage, few remaining games makers ?).

        And of course folding bikes………

        I am sure I’ve missed loads – what else is there ?

  6. Anonymous says:

    If the problems of macroeconomics could be waved away so easily then monetarism would have worked.

  7. Rods says:

    Hi Shaun,

    Another excellent blog, you analyse and blogg on things that are never reported elsewhere. Keep up the good work it is appreciated.

    My feeling for a long time is that CPI understates quite considerably inflation with RPI a little better. The nominal GDP figures seem to confirm this or am I missing something?

    The reason I asked the question the other day about people sending money to families abroad and also the repatriation of profits, was because of what is happening to the UK economy trade figures, these figures are going to get a whole lot worse due to:

    1. Declining Oil and Gas output.

    2. UK industry used to be a net global investor, now this is a deficit. So as more UK companies are taken over and their profits repatriated then this will make the figures worse.

    3. Immigration most of people I know that have migrated to the UK, send money home, a joke is that the biggest investors in India are UK Indian Restaurants. Now as a high wage relatively rich country it makes perfect sense to do this for the higher wage and job opportunities, if someone lives in a much poorer country. However if you are British, highly skilled and mobile then the opposite may is true, where you keep more of your income, by paying lower taxes and therefore have a lower overall cost base (Jenson Button and Lewis Hamilton as two examples), hence the more they tax the wealthy, the more they will off-shore, being replaced by lower earners from abroad. This along with red tape also applies to companies, hence the popularity of Asia and Eastern Europe for manufacturing, IT, accountancy and call centres.

    Personally, I think the balance of trade trend will continue to deteriorate because of the above. Still in a few years time when the UK needs to be bailed out by the IMF, at least we will be able to do so under the IMF’s original remit, unlike the Eurozone bailouts!

    To me this is groundhog decade, 1970’s all over again. With high taxes, excessive and out of control Government spending, a double dip recession and depression, profit and enterprise are dirty words again, a fractured and jealous of success society, rampant inflation and as things get worse and worse the UK will end up going to the IMF with their begging bowl again.

    To set the trend my records for the day are from the 1970s and are for Spain and Greece: Can the Can by Suzie Quatro

    Can the can
    Can the can
    If you can
    Well Can the Can

    and from the populous to western politicians and central banks: Amateur Hour by Sparks

    Amateur Hour goes on and on
    When you turn pro you know she’ll lets you know
    Amateur Hour goes on and on
    When you turn pro you know
    She tells you so

    1. DaveS says:

      The IMF bailed us out with 2.3 billion in 1976 – about 15 billion in today’s money (I think – can that be true ?). Now I know it can be expressed by the favoured %GDP trickery (GDP is just another fake inflated measure) but whatever way you look at it – this is pocket change today. Mervyn could print that much on his inkjet before breakfast. It wouldn’t even cover the monthly national deficit in a bad month.

      They have let the debts to build up to such ridiculous levels that I don’t think the standard IMF bailout recipe -(austerity, devaluation & couple of years punishment in the sovereign debt wilderness) – well it just can’t work any more. They couldn’t handle the UK – never mind the other PIG dominoes and lets not mention that other bankrupt across the Atlantic.

      Last time the IMF stepped in after the UK had finally had enough and decided to try and put the inflation genie back in the bottle. This time the inflation genie will be far too big and nasty to squeeze back in – I very much doubt that our great leaders will be able to control it.

    2. Anonymous says:

      Hi Rods
      We do have plenty of coal and we do have shale oil reserves. I am not an expert on fracking but I suspect that sooner or later we will go down that road. As to the coal reserves of all the debates and mud slinging that goes on concerning the Thatcher years I have always thought that the decision to abandon much of the coal reserves was a mistake. I am not talking about the Scargill/Thatcher fight simply that some of the reserves needed some maintenance to keep them open for the future and that was abandoned…

  8. geoffk says:

    hearing the spanish bank stress tests due at 17:00 bst will say €100-150 bln is necessary, higher than the €60bln mentioned

    1. Midge says:

      They say its 60bln euros.Will this be the first tranche?

      1. geoffk says:

        Or the last one before meltdown?

      2. Anonymous says:

        Hi Midge and Geoff
        Yes although I guess that they decided not to to exactly for the estimated figure and go for 59.3 billion Euros which after allowing for factors such as deferred tax assets- yes really- becomes 53.7 billion.
        There are however,ahem, some inconsistencies as Santander and BBVA for example have more cpaital under the adverse scenario than the baseline. The Mad Hatter has been holding another Tea Party….

  9. RedBanner says:

    Excellent post Shaun. Surely they are already at this?

    On the other hand will the inflation ever come?
    Hmmm. Surely once the markets loose faith in UK PLC’s ability to pay its way the interest rates will have to rise to defend the value of sterling? (Soon after the Government’s Autumn statement?)
    Now if that happens the home repossessions will start in earnest in 6,12 or 18 months and deflation will swing in to play?
    Or will the UK’s banks just fold and those that can will walk off with what they can carry?
    To be terribly Daily Telegraph can we have falling house prices and rising inflation?
    Have a nice weekend everyone.

    1. Anonymous says:

      Hi RedBanner

      We have had some inflation so far in the credit crunch era and whilst it has been at levels much lower than past peaks it has been pronounced if you consider our weak economic performance. As to future issues if history is any guide than the analogy is that of a brick on a piece of elastic. It gets pulled back and back and then twang it comes flying past you……So in some ways the longer the wait the stronger it may be.

  10. JW says:

    Hi Shaun
    Yes they are targeting nominal GDP because they want inflation. Yes we will all ( except for the 0.1%) become worse off by 30% or so. Yes productivity is decreasing because of increasing part-time work.

  11. DLinneridge says:

    Hi Shaun,

    Excellent input, possibly for me one of your best.

    There are a few apocryphal websites around, sounding doom
    and gloom, that I have glanced at. And
    personally I was classified as miserable in 2007 when I realised that ‘it’ was
    going to be bad, and told people I thought that maybe a ‘big’ bank was a risk,
    and that I didn’t rate the monolines chances as ‘it’ spread. What I couldn’t do was to articulate why I
    saw those things coming, not like you are able to do by rolling out little
    looked at issues and stitching them together.
    And by not commenting on politics, just the markets and their human nature
    driven reactions, for me thats the ideal way of presenting it.

    Now, as you point out, the problem has spread to countries from
    businesses (banks/insurers) and is percolating down at various speeds to the
    citizens (maybe subjects) of those countries, who are the final, unaware
    underwriters who are/will take the hit.

    So, to revert to being miserable. It seems to me that though your posts have
    changed marginally in tone over time (I found you in your early notayesman
    existence), but that the comments that you receive are becoming ‘darker’ in
    terms of your respondents thoughts. I
    have to hope that this is just my take, and that we are not speeding up and approaching
    the event horizon to what, in my lifetime, will be the ultimate black hole of European
    social disintegration.

    Certainly the coming high inflation, combined with the
    current policies, is going to be a tough pill to swallow.

    Thanks for the input.

    1. Anonymous says:

      Hi DLinnerage
      Thank you. As to changes over the 2 1/2 plus years I have been blogging I think thta is for others to judge rather than me. But one area which is now clearer is that then I worried that the official responses would be slow and incompetent whereas now we know that they have been!
      There are routes out of this but we have to choose to take them…

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