No sign yet of the UK “uncertainty shock” recession

I’ve done a number of posts over at Econlog on the massive uncertainty shock that hit the UK in June.  Most experts expected real GDP growth to immediately slow sharply, perhaps leading to a recession.  I had an agnostic view, and thought any negative effects were more likely to show up in lower RGDP than higher unemployment.  I still feel that way, although I’m starting to think that even RGDP will do better than I assumed:

The UK’s first official growth figures since the Brexit vote have confounded the government’s warnings of an immediate recession if Britain voted to leave the EU.

The economy was 0.5 per cent larger between July and September than three months earlier, according to the Office for National Statistics. The Treasury had predicted it would shrink 0.1 per cent.

[Those are quarterly figures, roughly a 2% annual rate.]  Why is the UK doing better than predicted?  I can’t be sure, but one possibility is that the BoE’s monetary offset was more effective than expected.  The British pound has depreciated sharply, even more than people expected:

“We would not get too carried away,” said Ruth Gregory of Capital Economics. “It could be that the economy is in a post-referendum ‘sweet spot’, whereby some of the positive developments since the vote, such as action by the MPC [BoE] have been felt before the major adverse consequences, such as a rise in inflation.”

I think that’s right, and I also still believe the actual Brexit (which will occur in about 2 1/2 years) will be modestly negative for growth.  But I can’t help pointing out that the only reason I think she’s right is because I totally reject the consensus of the economics profession on long and variables lags in monetary policy.  I believe that monetary policy affects NGDP within a month or two.  If I agreed with the consensus on lags I would have thought Ruth Gregory’s explanation was nonsense, and I would have looked for another explanation.  Those who do agree with the consensus on long and variable lags need to figure out how the UK economy held up after the Brexit vote.

To summarize:

1.  Brexit is an uncertainty shock, followed in 3 years by a real shock.

2.  The uncertainty shock might depress the economy by reducing AD (NGDP) or by reducing AS.  The central bank can prevent any reduction in NGDP.

3.  It appears that the impact of severe uncertainty shocks on AS is rather modest, although we’ll need another 6 months of data to have confidence in that preliminary judgment.

If the UK economy holds up, it will be further evidence that monetary policy drives the business cycle, especially in terms of changes in the unemployment rate.

That does not mean AS is not important, indeed in the long run it’s 10 times more important.  I.e. the US in a recession is more than 10 times better off than India in a boom.  Brexit still may have a long run negative supply-side impact on the UK; the size of the impact will depend partly on the sort of treaty they negotiate with the EU, and partly on how the political changes in the UK triggered by Brexit affect its economy.  My hunch is that the latter effect will be larger.  That is, the damage to Britain from May’s statist policies will exceed the damage from losing free access to the EU.

PS. It would be nice if the UK government had a NGDP prediction market, so that we’d know what the markets expected immediately after Brexit.



25 Responses to “No sign yet of the UK “uncertainty shock” recession”

  1. Gravatar of Market Fiscalist Market Fiscalist
    28. October 2016 at 06:56

    It is assumed that Brexit will be a negative shock because of its effects on trade (the EU will put up tariffs against the UK) and the harder the Brexit the worse the effect (the higher the tariffs will be).

    But some some aspects of Brexit (freedom from EU red-tape) would count as positive shocks, and the harder the Brexit the bigger the shock (Soft Brexit more-or-less means accepting all EU rules, but just not being in the inner circle).

    Do you think there is chance that the positive aspects of Brexit may outweigh the negative aspects and that is why we are already seeing better than expected growth (if that is what one can call annualized 2%!)

  2. Gravatar of ssumner ssumner
    28. October 2016 at 08:49

    Market, Yes, “a chance” but a very small one. The negatives for growth are far more powerful than the positive factors.

  3. Gravatar of Philo Philo
    28. October 2016 at 09:05

    So much else is happening–you mention May’s statist policies–that we won’t get a clean indicator of the effect of Brexit *per se*, even years from now.

  4. Gravatar of ssumner ssumner
    28. October 2016 at 09:55

    Philo, May is one of the effects of Brexit. Indeed when I initially opposed Brexit, I specifically said I was worried it was tied up in a larger swing toward right wing statist nationalism.

  5. Gravatar of BC BC
    28. October 2016 at 10:07

    Is May an effect of Brexit or was Brexit a reflection of an already existing swing towards right-wing statist nationalism, the same swing that led to May’s rise?

  6. Gravatar of Steve Steve
    28. October 2016 at 10:09

    Today’s news:

    * FBI Reopening Hillary e-mail investigation
    * Market falls 1% from midday price
    * Trump Odds up to 23.5%, Hillary plunges to 72.7% (neither 3.8%)
    * Harding spotted buying pumpkins

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. October 2016 at 10:22

    Following up on Steve’s comment;


  8. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. October 2016 at 10:27

    Oops, the quote from Kimberly Strassel’s WSJ piece was supposed to be the following;

    The cross-pollination is flagrant, and Mr. Band gives example after example of how it works. He and his partner Declan Kelly (a Hillary Clinton fundraiser whom Mrs. Clinton rewarded by making him the State Department’s special envoy to Northern Ireland) buttered up their clients with special visits to Bill’s home and tête-à-tête golf rounds with the former president. They then “cultivated” these marks ( Coca-Cola, Dow Chemical, UBS) for foundation dollars, and then again for high-dollar Bill Clinton speeches and other business payouts.

    Teneo’s incestuous behavior also included Mrs. Clinton’s State Department. The Band memo boasts that Mr. Kelly (while he was Mrs. Clinton’s State envoy) introduced the then-head of UBS Wealth Management, Bob McCann, to Bill Clinton at an American Ireland Fund event in 2009. “Mr. Kelly subsequently asked Mr. Mccann [sic] to support the Foundation, which he did . . . Mr. Kelly also encouraged Mr. Mccann [sic] to invite President Clinton to give several paid speeches, which he has done,” reads Mr. Band’s memo. UBS ultimately paid Bill $2 million.

    American Ireland Fund meanwhile became a Teneo client, and made Mr. Kelly (of former State envoy fame) a trustee, where he “ensured that the AIF is a significant donor to the Foundation.” AIF then bestowed upon Mrs. Clinton a major award on her final trip to Northern Ireland in 2012, in an event partly sponsored by . . . Teneo.

    Not that this is all one way. Mr. Band let slip just how useful all these arrangements were for Teneo, too, when he backhandedly apologized in the memo for hosting 15 client meetings in a hotel room rented by the Clinton Global Initiative.

    The memo removes any doubt that the foundation is little more than an unregistered super PAC working on the Clintons’ behalf. Donors to the charity are simultaneously tapped to give Bill speech requests and other business arrangements, including the $3.5 million he was paid annually to serve as “honorary chairman” of Laureate International Universities. Mr. Band’s memo also notes his success at getting donors to “support candidates running for office that President Clinton was supporting.”

    It’s now 2016 and Bill’s most favorite candidate is running for the presidency. There’s no question foundation donors are being “leveraged” for Mrs. Clinton.

    Like Irving Berlin wrote, for Hillary it’s, ‘Anything Trump can do, I can do sleazier.’

  9. Gravatar of ssumner ssumner
    28. October 2016 at 11:34

    BC, May is definitely a reflection of Brexit. She had almost no chance of becoming PM w/o Brexit.

  10. Gravatar of James Alexander James Alexander
    28. October 2016 at 22:08

    You are a bit behind the curve, but catching up.

    Slightly off topic, I wonder what you would have said about Amerexit in 1776?

  11. Gravatar of ssumner ssumner
    29. October 2016 at 09:45

    James, I probably would have opposed the war. Brexit is turning our worse than I feared. How about you?

  12. Gravatar of James Alexander James Alexander
    29. October 2016 at 11:10

    So America would still be part of the UK. Excellent news.

    I fear you only get information from the rabidly anti-Brexit crowd at the FT and the Economist. That would be like me relying only on Fox News or only on the NYT for news on the US. In fact, I only read for the real news on Brexit. And there really isn’t much. Our media is either clueless or rabidly Remain, often both.

    There really is no great fuss outside the chattering classes. The monetary easing was needed pre-Brexit and so for a Market Monetarist who believes in democratic accountability Brexit is a win/win. I agree nationalism isn’t great but a European superstate is horrible. They’ll be a good deal done in the end, once the posturing that fills the FT and The Economist pages dies down.

    You worry too much about politics and not enough, these days, about monetary policy. US NGDP growth of 2.8% is highly unsatisfactory, if not dangerously low. Economies need the freedom and flexibility that 5% NGDP growth gives them.

  13. Gravatar of Scott Sumner Scott Sumner
    29. October 2016 at 14:48

    James, You said:

    “So America would still be part of the UK.”

    Wait, is Canada still part of the UK? I thought it was a separate country. Did they have a war with Britain?

    I worry more about monetary policy because (at 2.8% NGDP growth) politics is far more important than NGDP growth. Money is neutral in the long run. The period from 2008 to 2014 is when people should have been obsessing about money.

    And are you saying that Theresa May’s speeches are being invented by the Economist and the FT? That she’s not really saying all those awful things?

    Can you tell me all the EU regulations that she plans to repeal once they leave?

    And why has the pound plunged so sharply, if not due to expectations of slower growth?

  14. Gravatar of Art Deco Art Deco
    29. October 2016 at 15:04

    James, I probably would have opposed the war. Brexit is turning our worse than I feared. How about you?

    Monthly readings of Britain’s growth rate have shown flux within normal ranges and the stock exchange is up. It’s ‘worse’ because there’s no indication that what you want has any justification to anyone who doesn’t share your taste preferences.

  15. Gravatar of Scott Sumner Scott Sumner
    29. October 2016 at 20:00

    Art, I don’t think you even understand what James and I are discussing. But it’s up to you how you want to spend your time.

  16. Gravatar of James Alexander James Alexander
    29. October 2016 at 23:41

    So was America right to leave Britain in 1776? One thinks of some of the awful laws that remained in illiberal America for so much longer than liberal Britain, like slavery. You don’t get worse labor regulation than that.

  17. Gravatar of James Alexander James Alexander
    30. October 2016 at 11:25

    Re: the GBP plunge, I wrote this in early July. It was inspired by you and some other Market Monetarists. And not by reading the conventional stuff in the FT and The Economist. Did you read it and a couple more like it soon after.

    Re: the “awful” things Mrs May is saying, I have no idea what you are talking about.

    Re: the trade deal, read this, not the FT or The Economist.

  18. Gravatar of ssumner ssumner
    30. October 2016 at 18:32

    James, You said:

    “So was America right to leave Britain in 1776? One thinks of some of the awful laws that remained in illiberal America for so much longer than liberal Britain, like slavery. You don’t get worse labor regulation than that.”

    That’s what I said, isn’t it?

    The awful things May has being saying? She’s clearly indicated that she wants to move the UK in a more nationalist and statist and less open direction. In numerous public statements.

    I’m afraid I don’t follow your comment on the pound. Yes, I favored monetary offset. But if the pound has to fall that much to prevent a recession, what does that tell you about the size of the real shock that hit the UK, or perhaps I should say expected real shock, as Brexit hasn’t happened yet. I didn’t say I opposed the BoE letting the pound fall, I merely noted the size of the decline.

  19. Gravatar of James Alexander James Alexander
    31. October 2016 at 12:14

    “Numerous public statements”. Really? For one thing she’s hardly made any statements. Cameron and Osborne were very statist, being a pair of wet Tories. And much more left wing than Tony Blair on economics.

    Is being in favour of a European superstate more or less nationalistic than a U.K. modest-sized state? Does “big” necessarily mean less nationalistic? China, Russia and the US are all intensely nationalistic.

    Post-Brexit the UK has the only truly loose monetary policy amongst major nations. The only one with a credibly flexible inflation target. The US is tightening. The overdue change in UK monetary policy is worth 20% off the currency, just like Japan achieved in the first flush of Abenomics.

  20. Gravatar of Scott Sumner Scott Sumner
    1. November 2016 at 05:18

    James, May is much more statist than Cameron, according to all the press reports I’ve read. But then maybe they are just making up all the stuff about May—how would I know?

    And I doubt Cameron favored a European superstate. The EU can’t even agree on a free trade agreement with Canada, I don’t think a superstate should be high on our current list of worries.

    I still think the UK will be less open under May (as does the bond market), I hope the bond market and I are wrong.

    I’m not sure UK monetary policy is more expansionary—what’s the market forecast of UK NGDP growth?

  21. Gravatar of James Alexander James Alexander
    1. November 2016 at 09:40

    Well, the newspapers you read hate May so I expect you do get a biased view. As we know, old and new media are intensely biased towards US-style liberalism. Read the Daily Telegraph or The (London) Times and you might get a bit more variety.

    “The bond market thinks the U.K. will be less open under May”. How in earth do you deduce that?

    If only we had any, anywhere, market forecasts for NGDP we’d be laughing. That said, market-implied UK inflation expectations have risen and most consensus (fwiw) RGDP forecasts aren’t much changed from pre-Brexit for 2016 and down a bit for 2017. So, NGDP expectations have probably stayed flat.

    NGDP growth had been horribly low, like in the US, or at least I think so. I know you are happy with 3% NGDP growth, though. We may have to disagree here.

  22. Gravatar of James Alexander James Alexander
    2. November 2016 at 03:35

    From near the top of Prime Minister May’s main speech since taking office:

    ” … But first, today, we’re going to talk about Global Britain, our ambitious vision for Britain after Brexit. Because 100 days ago, that is what the country voted for. We’re going to talk about Britain in which we are close friends, allies and trading partners with our European neighbours. But a Britain in which we pass our own laws and govern ourselves. In which we look beyond our continent and to the opportunities in the wider world. In which we win trade agreements with old friends and new partners. In which Britain is always the most passionate, most consistent, most convincing advocate for free trade. …

    Now of course, we wouldn’t have had a referendum at all had it not been for the Conservative Party – and had it not been for David Cameron. And I want to take a moment to pay tribute to David.

    I served in his Shadow Cabinet for nearly five years, and in his Cabinet for six more. I saw first-hand his commitment to public service, to social justice, and his deep love for our country. He led the rescue mission that brought confidence back to the British economy. He made sure that people on the lowest wages paid no income tax at all. And he won the right for two people who love one another – regardless of their sexuality – to marry. He has a legacy of which he – and our whole Party – can be proud. And to those who claim he was mistaken in calling the referendum, we know there is no finer accolade than to say David Cameron put his trust in the British people.”

    Free trade and gay marriage – right up our street.

  23. Gravatar of ssumner ssumner
    2. November 2016 at 08:01

    James, You said:

    “I know you are happy with 3% NGDP growth,”

    Actually I’m not. I said if the Fed is bound and determined to have a policy that yields 3% NGDP growth, then they should try to make it as stable as possible. That’s different from favoring a 3% target.

    To me, the overwhelmingly most likely explanation for the sharply lower real exchange rate for the pound is that the markets expect a more closed UK (less trade and immigration), a slower growing UK, and this requires a lower pound to provide equilibrium in the forex markets.

    I hope the markets and I are wrong about May.

    And yes, I read the Telegraph every so often, including pro-Brexit articles.

  24. Gravatar of James Alexander James Alexander
    2. November 2016 at 10:25

    We will have to disagree that there has been a change in U.K. Monetary Policy from targeting a 2% ceiling in projected inflation to tolerating above 2% projected inflation, and that this has little impact on the exchange rate.

    We will have to disagree on Mrs May despite my quotes from her single most important public speech since being elected. Nothing awful there.

    Thanks for clearing up your view on 3% NGDP growth. I had thought it was the bottom end of a range in which you were happy.

  25. Gravatar of ssumner ssumner
    3. November 2016 at 06:13

    James, 3% is fine with level targeting, but we don’t have level targeting, so it’s not fine.

    Britain does not have a simple 2% inflation target they have a flexible target. The higher expected inflation is due to rising import prices not domestic production. The BoE has always been (rightly) flexible on one time events (shocks) that they can “look past”, such as oil or import prices. There is no change in policy.

    With May, time will tell.

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