Sir Mervyn can't be pleased. The MPC is in a hole.

As in the US, growth forecasts were wrong all along.

There were a lot of very embarrassed members of the economics staff at the Bank of England, this morning. They messed up and it is certain that Sir Mervyn was not pleased, as now the MPC is in a hole. More of that in a minute. First, we need some background.

The Bank of England has put a good deal of resources into trying to understand the patterns of revisions to data in general and to GDP quarterly growth data in particular. Growth numbers are published by the ONS and then are revised over time as more data becomes available. So, not only is there uncertainty about where the economy is going, but also about where it is currently and where it was before. Over the past year or so, the MPC has based its forecast to growth and output not so much on the official ONS data but on what it thought it would end up being once it had gone through a revision cycle.

So, here is the latest forecast of the MPC taken from its August inflation report (2011). Everything to the right of the dashed vertical line is the forecast and the green lines are the 90 per cent confidence interval, which widens as the forecast moves further into the future. To the left of the line is the backcast, which also has error bands on it showing that it is measured with error. The black line shows the official data from the ONS. The fact that the green lines are mostly above the black line means that the MPC was expecting the data to be revised up. It didn't turn out that way.

 

 

[MPC's GDP projection based on constant nominal interest rates at 0.5 per cent and £200bn asset purchases, August 2011]

 

The table below shows the old data and the new data. A few facts stand out. First, the extent of the decline in output in 2008 and 2009 was greater than was previously thought: that output fell by 7.3 per cent between 2008 Q2 and 2009 Q2, compared with 6.6 per cent, as previously estimated. Second, the fall in output now appears to have stopped in 2009 Q2, rather than in 2009 Q3. Third data for 2008 Q3 has been revised down substantially -- recall that the first release was + 0.2 per cent. Finally, output over the last three quarters did not grow at all compared with the 0.2 per cent previously estimated.

Hence the staff and the MPC got it wrong and have collective egg on their faces. So did a number of others including Gavyn Davies, who in his blog article "Anglo Saxon GDP not as weak as it appears" argued on 1 May 2011: "It is quite likely that UK real GDP growth in the past two quarters will be revised up markedly from the zero rate which is currently estimated." Andrew Sentance has continued to argue that one of the major problems the UK faces is inflation, because the recession was much weaker than previously thought and the recovery much stronger. As ever, his analysis is negatively correlated with the actual outcomes. Kevin Daly from Goldman Sachs also claimed on 24 April: "Despite the uncertainty about the future, the UK's growth performance in the recent past has been better than is commonly portrayed." Wrong, chaps, sorry.

This is almost exactly what happened in August 2008, when the MPC failed to see the recession, because it assumed the back data would be revised up but, in the end, they were revised down. The MPC's forecast is now going to have to be lowered even further, bringing it closer to that of NIESR, which has been very bearish -- and on the basis of these numbers, they are likely to lower their forecast even further, according to Simon Kirby.

This means that the MPC has no alternative but to do more QE at its meeting tomorrow, proving Adam Posen has been right all along. The MPC can't afford to wait until November. I suspect also that some heads will roll at the Old Lady of Threadneedle Street -- and so they should. Embarrassing.

  OLD NEW
2007 Q1 1.0 1.1
2007 Q2 0.6 1.2
2007 Q3 0.5 1.2
2007 Q4 0.3 0.6
2008 Q1 0.5 0.0
2008 Q2 -0.3 -1.3
2008 Q3 -0.9 -2.0
2008 Q4 -2.1 -2.3
2009 Q1 -2.2 -1.6
2009 Q2 -0.8 -0.2
2009 Q3 -0.3 0.2
2009 Q4 0.5 0.7
2010 Q1 0.4 0.2
2010 Q2 1.1 1.1
2010 Q3 0.6 0.6
2010 Q4 -0.5 -0.5
2011 Q1 0.5 0.4
2011 Q2 0.2 0.1

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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Is Yvette Cooper surging?

The bookmakers and Westminster are in a flurry. Is Yvette Cooper going to win after all? I'm not convinced. 

Is Yvette Cooper surging? The bookmakers have cut her odds, making her the second favourite after Jeremy Corbyn, and Westminster – and Labour more generally – is abuzz with chatter that it will be her, not Corbyn, who becomes leader on September 12. Are they right? A couple of thoughts:

I wouldn’t trust the bookmakers’ odds as far as I could throw them

When Jeremy Corbyn first entered the race his odds were at 100 to 1. When he secured the endorsement of Unite, Britain’s trade union, his odds were tied with Liz Kendall, who nobody – not even her closest allies – now believes will win the Labour leadership. When I first tipped the Islington North MP for the top job, his odds were still at 3 to 1.

Remember bookmakers aren’t trying to predict the future, they’re trying to turn a profit. (As are experienced betters – when Cooper’s odds were long, it was good sense to chuck some money on there, just to secure a win-win scenario. I wouldn’t be surprised if Burnham’s odds improve a bit as some people hedge for a surprise win for the shadow health secretary, too.)

I still don’t think that there is a plausible path to victory for Yvette Cooper

There is a lively debate playing out – much of it in on The Staggers – about which one of Cooper or Burnham is best-placed to stop Corbyn. Team Cooper say that their data shows that their candidate is the one to stop Corbyn. Team Burnham, unsurprisingly, say the reverse. But Team Kendall, the mayoral campaigns, and the Corbyn team also believe that it is Burnham, not Cooper, who can stop Corbyn.

They think that the shadow health secretary is a “bad bank”: full of second preferences for Corbyn. One senior Blairite, who loathes Burnham with a passion, told me that “only Andy can stop Corbyn, it’s as simple as that”.

I haven’t seen a complete breakdown of every CLP nomination – but I have seen around 40, and they support that argument. Luke Akehurst, a cheerleader for Cooper, published figures that support the “bad bank” theory as well.   Both YouGov polls show a larger pool of Corbyn second preferences among Burnham’s votes than Cooper’s.

But it doesn’t matter, because Andy Burnham can’t make the final round anyway

The “bad bank” row, while souring relations between Burnhamettes and Cooperinos even further, is interesting but academic.  Either Jeremy Corbyn will win outright or he will face Cooper in the final round. If Liz Kendall is eliminated, her second preferences will go to Cooper by an overwhelming margin.

Yes, large numbers of Kendall-supporting MPs are throwing their weight behind Burnham. But Kendall’s supporters are overwhelmingly giving their second preferences to Cooper regardless. My estimate, from both looking at CLP nominations and speaking to party members, is that around 80 to 90 per cent of Kendall’s second preferences will go to Cooper. Burnham’s gaffes – his “when it’s time” remark about Labour having a woman leader, that he appears to have a clapometer instead of a moral compass – have discredited him in him the eyes of many. While Burnham has shrunk, Cooper has grown. And for others, who can’t distinguish between Burnham and Cooper, they’d prefer to have “a crap woman rather than another crap man” in the words of one.

This holds even for Kendall backers who believe that Burnham is a bad bank. A repeated refrain from her supporters is that they simply couldn’t bring themselves to give Burnham their 2nd preference over Cooper. One senior insider, who has been telling his friends that they have to opt for Burnham over Cooper, told me that “faced with my own paper, I can’t vote for that man”.

Interventions from past leaders fall on deaf ears

A lot has happened to change the Labour party in recent years, but one often neglected aspect is this: the Labour right has lost two elections on the bounce. Yes, Ed Miliband may have rejected most of New Labour’s legacy and approach, but he was still a protégé of Gordon Brown and included figures like Rachel Reeves, Ed Balls and Jim Murphy in his shadow cabinet.  Yvette Cooper and Andy Burnham were senior figures during both defeats. And the same MPs who are now warning that Corbyn will doom the Labour Party to defeat were, just months ago, saying that Miliband was destined for Downing Street and only five years ago were saying that Gordon Brown was going to stay there.

Labour members don’t trust the press

A sizeable number of Labour party activists believe that the media is against them and will always have it in for them. They are not listening to articles about Jeremy Corbyn’s past associations or reading analyses of why Labour lost. Those big, gamechanging moments in the last month? Didn’t change anything.

100,000 people didn’t join the Labour party on deadline day to vote against Jeremy Corbyn

On the last day of registration, so many people tried to register to vote in the Labour leadership election that they broke the website. They weren’t doing so on the off-chance that the day after, Yvette Cooper would deliver the speech of her life. Yes, some of those sign-ups were duplicates, and 3,000 of them have been “purged”.  That still leaves an overwhelmingly large number of sign-ups who are going to go for Corbyn.

It doesn’t look as if anyone is turning off Corbyn

Yes, Sky News’ self-selecting poll is not representative of anything other than enthusiasm. But, equally, if Yvette Cooper is really going to beat Jeremy Corbyn, surely, surely, she wouldn’t be in third place behind Liz Kendall according to Sky’s post-debate poll. Surely she wouldn’t have been the winner according to just 6.1 per cent of viewers against Corbyn’s 80.7 per cent. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.