Is the United Kingdom currently suffering from an aggregate demand problem?

1. CPI annual inflation stands at 2.9% in June.

2. Core inflation stands at 2.3% and has not been below 2% in some time.

3. The producer price index is showing 4.2% inflation (see the first link).

4. Unemployment is falling, and is becoming increasingly a problem of long-term unemployment, which has less to do with aggregate demand.

5. There is now a surge in residential building.

6. Manufacturing PMI just rose to 54.6, a strong performance and one which cannot be attributed to the glitter of the global economy.

The following, however, may still be true claims and indeed likely are true claims:

7. AD problems from the past still have persistent effects in July 2013, including on long-term unemployment.

8. The UK government cut back on some critical investments, and furthermore those cutbacks created enduring sectoral shift problems when it comes to employment.

9. The path of ngdp growth should have been higher in the recent past.

Still, when I look at the UK economy of July 2013, I don’t see an economy wracked with current aggregate demand problems.


#4 is only the case because of a collapse in (measured) productivity. Unless the statistics are wrong, the fall in unemployment is basically attributable to a shift to lower-wage less-productive economic activity, which is not a great story about resurgent demand.

#5 is good news but not exactly as important as the UK government would like to think. Residential construction in the UK is low compared to many other countries due to the simple fact that it's difficult to get permission to build. A "surge" to the "highest levels in three years" is only impressive if you think that the UK was building a large number of houses back in 2010. (Hint: they weren't).

That said, there does seem to be some kind of recovery underway. With less than 2 years to go until the next general election, and given the very political nature of the UK treasury, one can imagine that the government will try to avoid pissing on the bonfire this time. How far should the UK government tolerate an inflationary mini-boom, given the massive (N|R)GDP undershoots between 2009-13?

I still haven't had time to dig deep in the productivity conundrum of the UK. If this reflects people moving away from finance and the City weighting a bit less in the UK economy, this would be great news...

I am still impressed that the UK hasn't gone into recession with its 'austerity' so that's overall positive.

BUT: Like everywhere else, there seems to be a chunk of 'discouraged' workers, reflected in the relatively low employment ratios and, I'd also want to know what's happening to the individuals' indebtedness. The UK is famous for its people running the tab on CCs and using their houses as ATMs...

"I am still impressed that the UK hasn't gone into recession with its ‘austerity’ so that’s overall positive."

I assume that was snark.

When did aggregate demand problems dominate, and did you strongly call for measures to boost aggregate demand then? I don't recall you ever doing that (e.g.,, so is this post a recognition that you should have?

Of course I did call for such, through monetary policy.

What a weird critique. What if he hadn't? AD is a measure. That doesn't mean you accept anyone else's judgment of its value as an input.

And to this stellar performance we have to thank …. austerity (partly). There's a new statue on a vacant plinth in Trafalgar Square by the way. A giant blue cock designed by a German artist. Some would say no doubt that a pink bull would have been more appropriate. I don't think so, too many China Girls in the shop. Truth is, only the Germans understand the English cockiness.

Austerity defined as what exactly?

I'd say we have BOE to thank for this performance being "less than stellar" instead of Eurozone depressing. The British should thank George Soros again for saving them from the Euro; a few billions in exchange losses was a small price to pay.

Why is long-term unemployment not linked to aggregate demand?

by definition?

Can someone elucidate on that? Is that because long-term unemployment is considered to be closer to voluntary unemployment?

That seems a poor assumption, if that's what it's based on.

#6: I would like to see that remain strong for a few more months before drawing any conclusions. Two data points is not a trend. I'd also look at prices received. The latest US report shows a drop in prices received and static hours worked. The better than expected print could very well be price cuts to clear inventory.

As to the general question, I think AD will remain a problem everywhere. The massive expansion driven by credit did not happen over night. It will take at least a decade to soak it up. Mistake by policy makers add years to the sentence.

Re #7, what were the "critical investments" "cut back"? To my knowledge, the biggest reductions to government capital expenditure came from stopping the building of new schools and hospitals - potentially beneficial if cost-effective (which was a serious issue), but I'm not sure you can argue that their cancellation prevented any sectoral shift. That's not to say there aren't infrastructure gaps that may have that role - but I'm not sure that they were being tackled and have now been cut back.

8. The UK government cut back on some critical investments, and furthermore those cutbacks created enduring sectoral shift problems when it comes to employment.

This seems like a pretty vague statement.

It's most likely intentionally vague. There were a lot of cutbacks. TC isn't an exper on the UK public sector. It's reasonable to postulate that some of the cutbacks were far from optimal. They usually are.


How come you never mention record low growth in average weekly wages in the UK? Or how CPI in the UK is just structurally higher through tax items?

Two of these points are about a relatively small manufacturing sector where conditions are largely exogenous. And residential investment is incredibly low- you are merely quoting a small rise from an incredibly low base.

Demand problems are lessening. But to turn the question around- what UK problems would be Worse if UK AD were higher?

What England and Ireland are suffering from is owning the shares and debt of otherwise failed banks.

To pay for their "acquisitions" of banks, the government cut programs that benefited other segments of society, and reducing aggregate demand, all to protect bondholders and those in the financial services "industry".

Austerity to prosperity. Except when it comes to financial institutions and their debtholders.

I think one problem is that economists like to oversimplify and discuss things as if the effects are pure AD or AS when in reality it is much more complex. I am convinced that the Euro clusterf@#$ is creating AS problems. I think it was Nick Rowe who had a great argument that the Canadian slowdown was caused by AS shocks due to the US AD shortfall. Of course the US doesn't really have the exposure to foreign economic problems that many other countries do and it would be problematic to infer too much.

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