GDP revisions to be published by the Office for National Statistics (ONS) on 30 September will reveal significantly stronger growth in recent years, helping to explain the “productivity puzzle” and confirming that the double / triple dip scares of 2012 and 2013 were wide of the mark.
The ONS has already indicated the scale of revisions up to the fourth quarter of 2013; the 30 September release will extend the process to the present. The currently-available numbers show that the recovery was weaker than previously thought in 2010 but significantly stronger over 2011-2013. GDP is now estimated to have risen by a cumulative 6.0% between the fourth quarters of 2010 and 2013, equivalent to 2.0% at an annualised rate, versus a prior 4.2%, or 1.4% annualised.
GDP surpassed its pre-recession peak in the second quarter of 2013, one quarter earlier than previously thought.
GDP growth in calendar 2013 has been raised from 1.7% to 2.2%. The consensus at the time was for a sub-1% outcome, with much talk – notably from the IMF – of the risk of a recession (in contrast to the positive view taken here).
The end-September release may extend the upward revisions to growth since the fourth quarter of 2013. Even if the quarterly path since then is unchanged, however, the upgrades to earlier data imply that the GDP increase in calendar 2014 will be raised from 3.0% to 3.3%.
The revisions reflect a combination of methodological changes and new data. According to the ONS, the biggest impact has come from measures to improve coverage of small business activity and capture income concealed by tax evasion. The revisions could affect sectoral financial balances (i.e. income minus spending); as previously discussed, the household sector is currently estimated to be running a deficit.
The revisions are unlikely to alter MPC thinking: the direction, if not the scale, was expected and the MPC will attribute most of the upgrade to better supply-side performance, implying little change to its estimate of slack. They are potentially more significant for fiscal policy, since they may result in the Office for Budget Responsibility (OBR) raising its estimate of trend GDP growth, in turn boosting revenue forecasts. The scale of fiscal adjustment needed to meet targets, therefore, may be smaller than the OBR judged at the time of the July Budget.
Economists expect stronger US growth next year but a further slowdown in China. The average forecast for US GDP growth in 2016 is 2.7%, up from 2.3% in 2015, according to Consensus Economics. Chinese GDP expansion, meanwhile, is projected to fall from 6.9% to 6.7%. Given a widespread belief that GDP data are manipulated, the consensus probably expects a larger decline in actual Chinese growth.
Narrow money trends, however, are giving an opposite message for economic prospects. Six-month growth of US real (i.e. consumer price-deflated) M1 fell to 0.6%, or 1.3% at an annualised rate, in August, the lowest since January 2010. Chinese real “true” M1* growth, by contrast, rose to 4.1%, or 8.3% annualised, a 20-month high – see chart.
Narrow money signals have provided valuable insights in both countries in recent years. US six-month real M1 growth fell in summer 2014 ahead of an economic “soft patch” in early 2015. It rebounded strongly around end-2014, predicting faster economic expansion over the summer / autumn: GDP rose by 3.7% annualised in the second quarter. Chinese real true M1, meanwhile, contracted during the second half of 2014, forewarning of recent economic weakness.
Narrow money is a leading indicator because the demand to hold it is influenced importantly by spending intentions. The US M1 slowdown suggests that households and firms have turned more cautious and are scaling back their plans, possibly temporarily, ahead of expected Fed policy tightening. The Chinese pick-up, by contrast, is evidence that monetary and fiscal policy easing is gaining traction by lifting confidence and spending intentions.
Chinese M1 strength contradicts claims that domestic liquidity would contract as a result of foreign exchange intervention to support the currency (“quantitative tightening”). Such claims amount to treating Chinese monetary arrangements as a pure currency board, ignoring the panoply of tools available to the authorities to offset intervention effects on the monetary base and money holdings of households and firms.
If the message of current narrow money trends is correct, US GDP growth will, once again, fall short of the consensus forecast in 2016, suggesting limited pressure for Fed rate hikes. A rebound in China, meanwhile, should support global economic expansion. Such a combination could imply a favourable backdrop for markets. Additional US M1 weakness, however, or a relapse in China, would be concerning.
*True M1 = official M1 plus household demand deposits. Official M1 = cash in circulation plus demand deposits of corporations and government organisations. Annual true M1 growth rose to 8.9% in August from a low of 2.0% in March.
UK pay growth is picking up strongly, consistent with the historical relationship with the job openings or vacancy rate*, a measure of labour market tightness. This relationship suggests a continued upswing through mid-2016, at least.
Average weekly regular earnings (i.e. excluding bonuses) rose by 3.2% in the year to July, the largest annual increase since 2008. Private sector growth was 3.7% versus only 1.1% in the public sector – the recent gap is the largest on record in data extending back to 2001.
The latest Bank of England argument for delaying raising interest rates is that the pay pick-up is being accompanied by faster productivity expansion, so unit labour cost growth remains too low. This may not be true for much longer but, in any case, stronger productivity growth is a double-edged sword for policy, since it also suggests faster trend GDP expansion and a higher “equilibrium” level of rates.
The current earnings pick-up is consistent with the historical relationship with the job openings rate. As noted in a post in September 2014, “the openings rate bottomed in 2009 but embarked on a sustained rise only in the second quarter of 2012. Based on the average nine-quarter lag following the three increases over 1970-90, this suggests an upswing in earnings growth starting in the third quarter of 2014.” Regular earnings growth has risen steadily from a low of 0.7% in the second quarter of 2014 – see chart**.
The increase in pay growth is more impressive against a backdrop of falling / low consumer price inflation, which would be expected to subdue wage demands.
The job openings rate rose further in the fourth and first quarters, surpassing its 2008 high, though has since fallen slightly. If the first quarter peak is confirmed, the minimum six-quarter lead over 1970-90 would suggest a continued uptrend in earnings growth through the third quarter of 2016, at least.
*Vacancies as a percentage of employee jobs plus vacancies.
**Quarterly data except for the last data points, which refer to July for earnings and the three months to August for the openings rate.
Chinese headline money numbers for August were moderately encouraging, suggesting that policy easing is gaining traction. Annual growth of the broader M2 measure was unchanged from July at 13.3%, the fastest since July 2014. Narrow money M1 growth, meanwhile, jumped from 6.6% to 9.3% – see first chart.
The August numbers contradict claims that heavy currency intervention would result in a contraction of domestic liquidity. Foreign exchange reserves fell by $93.9 billion in August, equivalent to 0.4% of the stock of M2 and 1.6% of M1. The impact of balance of payments flows on the money supply, however, is usually swamped by other influences – in this case, monetary and fiscal policy loosening.
The preferred money measure here is “true M1”, which adds household demand deposits to the official M1 measure*. An August figure for household demand deposits is not yet available; unless they fall sharply, however, annual true M1 expansion will rise further from July’s 6.4%.
The six-month change in real (i.e. CPI-adjusted) true M1 turned negative at end-2014, signalling economic weakness during the first half of 2015. It recovered, however, through July – second chart. Industrial output regained momentum in the early summer, although the August number due shortly may show a relapse, judging from survey evidence.
Broad credit trends remain soft: the estimated stock of “total social financing” rose by an annual 11.7% in August, down from 14.5% a year earlier**. Growth, however, has stabilised recently, consistent with a trough in economic momentum.
*The exclusion of household demand deposits from the official measure may reflect their historical unimportance. Official M1 = cash in circulation plus demand deposits of corporations and government organisations.
**Stock estimated by cumulating historical flows.
The dollar value of Chinese exports fell by 5.5% in the year to August, after an 8.3% annual decline in July. This weakness, however, mainly reflects the strong dollar: Chinese exports are still gaining market share.
The dollar value of global exports fell by 10.4% in the year to June, the latest available month, based on data compiled by the Dutch CPB research institute. Chinese exports rose by an annual 2.8% in the same month.
The June numbers are not exceptional: the annual change in Chinese exports has been mostly significantly higher than that of the global total recently – see first chart. There is little sign, in other words, that the trend increase in China’s export market share is slowing, let alone stalling or reversing.
German July trade figures also released today showed 6.2% annual growth in exports – but in devalued euro terms. Expressed in dollars, German exports were down by 13.6% in July – much worse than the 8.3% Chinese decline.
China is also outperforming other Asia countries: Korean and Taiwanese exports, for example, were down by 14.7% and 14.8% respectively in the year to August.
A crude seasonal adjustment of the Chinese data suggests that exports bottomed in March*, recovering further in August – second chart.
The rising market share contradicts claims that an uncompetitive exchange rate is depressing exports and growth. A further devaluation would probably have a negative net impact on growth, as additional capital outflows resulted in tighter domestic monetary conditions.
*The unusually late timing of the New Year holiday may have raised February exports at the expense of March.