Last week we took cheer from the level of bank funding rates as being a sign of economic recovery – talk about crumbs of comfort! We needn't have bothered: the U.K. quarterly gross domestic product (GDP) growth statistic was a jaw-dropping 1.00 percent rise on the second quarter. Hurrah! So everything's all right then…
This column has suggested on several occasions that the early first estimate GDP number – coming a mere 17 working days after the quarter has ended – serves no purpose because it is based on materially incomplete data and always subject to significant revision. Far better for all concerned to wait until later in the month or indeed the following month to publish this statistic. But we are happy to take the smooth with the rough; we had to suffer the consequences of the -0.7 percent reported drop for the first quarter that later got revised up to -0.4 percent, by which time the damage to consumer confidence and corporate spending plans had already been done, so we'll happily exhort all and sundry to go ahead with their capital investment projects, not to mention their summer holiday bookings, now we have this strong growth figure to crow about!
The point here is that for many the headline is all that matters. It gets a little too technical and arcane to quote the second and third revisions, the statistical one-offs like Jubilee holidays (reduces output) and Olympics (increases output) and other small-print items, so people just ignore it. Number positive, confidence rises and activity increases; number negative and all this heads the other way.
So can we take the third quarter number and run with it? Up to a point, yes. On the plus side we have other encouraging statistics to cite this week, including higher mortgage approvals and retail sales numbers. It's fairly easy to conclude we are over the worst, provided the euro zone doesn't blow up (a possibility that is always with us but off the radar for the next 12 months at least, thanks to Mario Draghi) and one would hope to see business confidence improving accordingly.
On the minus side we have the one-off impact of the Olympics and the continuing slide in manufacturing output. In other words, policy action has to remain focused. The labor market remains ripe for more proactive assistance from the government – a freeze in new hire payroll taxes would do wonders to incentivize big and small companies to take on more staff, in the EU as well as U.K. It's a pity this subject doesn't have some high profile person in business or media bleating on about it, so that the government would take more notice. Youth unemployment is still too high, tackling it should be a much greater priority than it is.
The improvement in GDP has re-opened the debate about what central banks should be targeting. The U.S. Federal Reserve has a growth as well as inflation target, shouldn't the Bank of England and the European Central Bank have the same, rather than just their narrow inflation objectives? Inflation targeting didn't stop the crash (that wasn't actually its objective, but hey why bother with the small print?), and everyone is exercised by output growth, shouldn't we tackle that instead?
Yes we should, but there is much to be said for price stability. Don't take my word for it, speak to any Argentine, Zimbabwean or distinctly elderly German who still remembers the Weimar Republic. The two areas are not aligned from a targeting point of view, so focusing on growth will result in inflation figures suffering, and sometimes vice versa. In fact the most sensible approach is to recognize the contradictions that targeting both areas represents and be flexible about it. In other words, a rigid orthodoxy – whatever the political bent – is not what is called for here, on either side of the Atlantic.
And so, by a circuitous route, we come to my main point this week: can everyone, from presidents and central bank governors and IMF/World Bank/OECD heads downwards, stop pretending that they have the answers please? No-one is 100 percent right on any of this. There is plenty of educated and informed judgement, and some illiterate analysis as well, but that's all. Inflation targeting didn't cause the crash, and we shouldn't abandon it, but an eye on GDP growth and employment numbers is as important. We have to balance all these things and work towards the optimum outcome No one economic ideology or dogma has the answer, so we need to be flexible on policy and able to respond decisively to events. It isn't Plan A versus Plan B or Plan Z, but rather a flexibility that targets the right things at the right time. And right now its jobs, jobs, and more jobs…
Professor Moorad Choudhry is Treasurer, Corporate Banking Division, Royal Bank of Scotland.
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