Britain’s curious economic recovery

Simon Nixon reports:

Now the U.K. is providing another mystery. Next week’s GDP data are likely to show that the economy grew 0.8% in the third quarter compared with the previous quarter. Indeed, if recent survey data are to be believed, growth could be heading for 5% year-over-year, according to Rob Wood, chief U.K. economist at Berenberg Bank.

Yet this growth spurt has taken economists almost entirely by surprise. It is hard to identify a single leading forecaster predicting such a strong recovery at the start of the year, or even at the end of the first quarter.

At least two points are worthy of note.  First, the possibility of catch-up growth, at least for countries with reasonably well-functioning labor markets, has in general been under-discussed in the debates on “austerity.”  Second, it still may be the case that a latter British generation may have lower real wages than their immediate forerunners.


Cameron just wants to stick it to Krugman.

After getting hung-out-to-dry by Obama over Syria, can you blame him?

How might broader European trends be related? Is Britain the Texas of the EU?

UK has a floating exchange rate-- depreciated c. 30% against the other major currencies since the Crisis began.

Proportionate to economy size, Quantitative Easing is probably bigger in the UK than in the USA. Bank of England holds 30% of all gilts outstanding.

In terms of property prices the UK is most definitely not Texas. UK (south) has some of the highest property prices in Europe. London has the highest property prices in Europe and comparable to NYC. So more like New York than Texas.

Largest export partner is Europe and exports not doing well.

However we are having a housing boom: London housing prices rose +10% in a month (unadjusted index).

I was thinking more of the job market and the tax burden. The unemployment rate in the UK is much lower than the EU average, for example.

The housing picture is not so clear, but London is obviously exceptional. Comparing London or the region around London to entire countries is not really valid.

I was in Hong Kong last week and was amazed to see the papers full of advertisements for London property. I guess property exports could be one of the UK's biggest earners. What looks like a big trade deficit with China is being recycled into London property. A thousand years or so of stable government and rule of law is actually worth something.


But they are not buying in Newcastle-- or even Bristol AFAIK. So there is also something about 'London'.

BTW they are also buying in Toronto and Vancouver, and that's not about 1000 years of anything (granted a government modelled on its English progenitors).


London has 8 million people, plus adjacent counties you are 18 million people. That's 1/3rd population of England and more than 1/4 population of the UK. GDP it's probably arounf 40% of GDP.

So the UK is one of the world's 10 largest economies, and we are talking about 40% of it.

I think comparing 'the region around London' to Texas, say, is valid. Or indeed to many countries.

Note unemployment in many other parts of the UK is much higher (as it is in London itself, vs. the surrouncing areas).

This surely isn't the first time that a bunch of economists were taken by surprise? Groupthink?

This is a strange time to claim "groupthink", since both austerity in general and Britain's specific policies have been at the center of a major debate among economists. Experts are interpreting these events through many different lenses, but apparently none of them saw this coming.

I'm not biased towards either camp. My point is just that economics as a field hardly has an impeccable prediction record.

'economics as a field hardly has an impeccable prediction record'

That is not true - it is a field where the abundance of predictions ensures that at least some are correct.

The number of truly independent economic forecast are a lot lower than you suspect.

The typical major bank and brokerage house economist takes the results of a very few major econometric forecasts and changes them one or two percent and calls it independent thinking.

These economist share the same problem that portfolio managers face. As a portfolio manager if you do the same thing as everyone else and do poorly you probably will still keep your client base. But if you do follow an independent portfolio strategy and do poorly you will lose much of your client base. Economist face the same tradeoff. If your forecast is near the consensus and you are wrong you will probably keep your job. But if you make a non-consensus forecast and you are wrong you probably will lose your job.

Of course there is always a market for a few extreme forecast, especially if they support right wing ideology.


Its a little known fact that the 'eco' part of the word 'economist' is not derived from the greek word "okionomia" (ie the practice of household management), but is actually a contraction of the word "echo". Because that's pretty much what most of them do.

Keep in mind this is with an ~8% budget deficit. What austerity?

The truly savage kind!

The UK didn't actually do austerity as spending still rise slightly but, still, what does this say about the $8 trillion the US chalked up to the red in the last 5 years?

Wait, how is 0.8% quarter to quarter growth and nearly flat unemployment suggesting any miraculous recovery again?

That doesn't fit the MR theme of advertising developments that seem to support austerity and setting aside those that do not.

This is not an annualized rate. On an annualized basis it would be 3.2%

The Europeans, including the UK, generally do not annualize quarterly GDP growth rates.

This says more about the lack of forecasting prowess than anything else.

Another reason: UK GDP data isn't actually very accurate. This is most likely error induced volatility with underlying economic performance being more prosaic.

ie the UK was not such a poor performance since 2008 relative to other countries and is not such a great performer now.

Yes, but UK GDP data is usually pessimistic and then revised up in the following months.

I'm not sure how 0.8% in the last quarter adds up to 5% in the year. It was 0.7% Q1 to Q2 (revised up from 0.6%), 0.3% Q4 to Q1, -0.3% Q3 to Q4 2012. So the last 4 quarters appear to add up to 1.5%. Someone must be forecasting 3.2% growth for the next quarter!

You forgot compounding (though it still doesn't add up). I think they must be talking about the future, though.

I've become convinced over the years that most "mysteries" of this sort can be explained by the underlying data not being accurate, and the accuracy has tended to get worse. Of course if the underlying data is consistently not accurate you really can't do most social science, so the issue gets ignored!

This was my first thought, too. How reliable is the data on which this is based? Is there a lot of variation that doesn't track with the real economy, or revision as better data comes in later?

I've seen the opposite. Most mysteries like this usually are because the models used for prediction are horrible and have incorrect assumptions.

tj, it's not just forecasting prowess, but measuring prowess. My first reaction is that it is straight up measurement error.

I don't have time to get the data right now, but if you look at GDP revisions for the US, you can easily justify adding "margin of error" of around 0.5% of GDP.
[Note it is not a true margin of error in the statistical sense, but we could still think of a number where, say, 68% of revisions are smaller than the given number]

Two anomalies:
(1) consumption continues to grow, despite a decrease of real wages. Lately, average hours have been increasing as well as employment, but that can't still explain all of it, especially as many of the people staying in the labourforce are doing so because their pensions are cut.
(2) the decrease of productivity which is reaching epic proportions
(3) a large difference between Eurostat and ONS data on exports

Combined and adding a bit of statistical experience (sometimes, military exports are not included in the export statistics or, as we found out once, classified as bycicles (there was a huuuuuuge anomaly in bycicle exports)) this might mean that the military export industry in the UK is booming. a little googling yielded this link, which suggests that the government has become easy on export permits.

If this your definition of a booming economy, then the Japanese economy for the last 20 years is a grand success.

Has Japan had even one quarter as good as this in the last 20 years?

Are people in Japan eating catfood? They are well dressed, well educated, have good medical care, and are not in distress. Remember the Tsuanmi, and Japan told other countries, we don't need your economic help. But, how is that when your Debt is 200%,?

The thing is the Japanese owe the debt to themselves. The largely self finance through individual Japanese savings, much of it through Japan Postal Bank. When the Japanese government services its debt, the flow of money goes into Japanese saver's hands.

The balance sheet recession that started in the 80's in Japan has the same roots as the one ignited here in the U.S. after Graham Leach Bliley. It was a flood of credit bank money chasing after relatively fixed land/housing. Finance insurance and real estate teamed up to bubble this sector of the economy. In both the Japanese case, and the U.S. there was some underlying exuberance due to Japanese Lean Manufacturing, and later the U.S. technological revolution. This exuberance in turn fueled even more credit money to chase after fixed land that doesn't follow supply and demand curves.

Later, after the money supply does not keep up with the debt claims, the money supply collapses in an equally exuberant way. Why, because credit money is positive feedback. When the economy tanks, nobody takes out loans, while the drain loan payment continues. The money supply shrinks rapidly, and since money is demand, the economy craters.

Japan did counter spend with government deficit spending, but they never did wipe out the private debts. The private debt holders, i.e. the banks and bondholders then have a claim on society since the 80's. Fortunately the high personal savings rate did not let the Japanese Government to borrow outside of their country, and hence they owe to themselves. The bankers also have racial and nationalist feel for their homogeneous country, so they don't abuse by becoming predatory, whereas that may not be the case in the "international" west.

Or it could be that austerity (even as weak and fake-ish as it was in the UK) leads to long term growth.
This is probably why modelers are surprised... they implicitly assume Keynesian models.

The UK enjoyed a few months of strong data in Q3, but to think this is a recovery that had legs would be a step too far.

The government borrows more than the economy grows. How's that good?
The horrendously indebted (and still sinking in debt) UK is hopeless as long as it stays in the EU and probably even if it exits.

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