A guide to economic startistics for practitioners and students

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ForothertitlesintheWileyFinanceseries
pleaseseewww.wiley.com/finance

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Trading Economics
A Guide to Economic Statistics
for Practitioners and Students

TrevorWilliams
VictoriaTurton

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Thiseditionfirstpublished2014
©2014TrevorWilliamsandVictoriaTurton
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Williams,Trevor,1957–
Tradingeconomics:aguidetoeconomicstatisticsforpractitioners&
students/TrevorWilliams,VictoriaTurton.—1
pagescm.—(TheWileyfinanceseries)
Includesbibliographicalreferencesandindex.

ISBN978-1-118-76641-5(hardback)—ISBN978-1-118-76631-6(ebk)—
ISBN978-1-118-76638-5(ebk)—ISBN978-1-118-76629-3(ebk)1.Finance—
Statistics.2.Moneymarket—Handbooks,manuals,etc.I.Turton,Victoria,
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330.01′5195—dc23
2014007150
AcataloguerecordforthisbookisavailablefromtheBritishLibrary.
ISBN978-1-118-76641-5(hardback)ISBN978-1-118-76631-6(ebk)
ISBN978-1-118-76638-5(ebk)ISBN978-1-118-76629-3(ebk)
Coverimage:Shutterstock.com

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CONTENTS
Acknowledgements
Introduction
SurpriseIndices
MappingaNewLandscape
Note
1Surveys
SurveysandBehaviouralEconomics
TypesofSurvey
BusinessSurveys
ConsumerSurveys
Conclusion
Notes
2EconomicGrowth
EconomicGrowthThroughtheAges

GDP
WhatisGDP?
BreakingDownGDP
WhyisGDPimportant?HowisItMeasured?
IndexNumbersofGDPandthePriceDeflators
UsedinCalculatingThem
DetailedBreakdownoftheGDPMeasures
AMarketLink
ComponentsofGDP
Conclusion
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Notes
3LabourMarkets
EmploymentTrends
WhathasDriventheChange?
ConsequencesforEconomicGrowth
PhillipsCurveShowsnoDurableTrade-OffExists
NAIRUMattersMore
EmploymentMeasures
WhyWeMeasureUnemployment
TheNatureofUnemployment
TheImpactofDemographicsonLabourMarkets
Vacancies
ChangingLabourPatterns
TheUKinComparisontoItsGlobalCompetitors
HowdoWeExtractValuefromThis?
Conclusion
Notes

4Inflation
WhatisInflation?
TheHistoryofInflation
CausesofInflation
Earnings/WageInflation
PriceBasket
HowisPriceInflationMeasured?
GDPDeflator
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WhysoManyMeasuresofInflation?
AFocusontheCPIandRPI
WhyisInflationImportant?
Deflation
OtherMeasuresofInflationTargeting
HowcanWeExtractValuefromThis?
Conclusion
Notes
5MonetaryStatistics
MonetaryPolicyandInflationManagement
TheUKinaGlobalContext
CentralBank'sRole
WhatAbouttheBankofEngland?
HowMonetaryPolicyWorksintheUk
DecompositionofMoney
WhydoesMoneySupplyMatter?
WhyIsThisSortofAnalysisUseful?
ABriefHistoryofMonetaryTargeting
HowDoWeExtractValuefromThis?

Conclusion
Notes
6FiscalIndicators
ABriefHistoryofUKFiscalPolicy
MeasuringGovernmentDebt
FiscalPolicyImpactandTerminology
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TheImpactofGovernmentonMarkets
FiscalPolicyandGrowth
TheDataWeShouldConsider
FiscalPolicyinBoomandBust
MarketRelevance
BankofEnglandRegainsRegulatoryPowers
WhatRoleDoestheOfficeforBudget
ResponsibilityPlayintheFiscalPolicyProcess?
TheMonetaryPolicyCommittee
ForwardGuidance–AnotherBankInnovation
TheDebtManagementOffice'sRole
ComparisonofInternationalDebt
FiscalTargetsAddCredibilitytoDebtReduction
HowCanWeExtractValuefromThis?
Conclusion
Notes
7GlobalTradeStatistics
WhatIsaCountry'sBalanceofPayments?
WhyDoWeMeasuretheBalanceofPayments?
WhatDoesItMean?
TheConceptoftheBalanceofPayments

UKIsnotAloneinHavingaTradeDeficit
AChronicGoodsDeficit
AChronicServicesSurplustoOffset(Almost)the
TradeDeficit
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TheEver-ChangingPatternofVisibleandInvisible
Trade
BalanceofPaymentsandGDP
ShiftingTradePatterns
HowCanWeExtractValuefromThis?
Conclusion
Notes
Conclusion
Beanchoredtothedataflow
Somekeypointstotakeaway
Note
Appendices
Appendix1Surveys
CBIIndustrialTrendsSurvey
CBIDistributiveTradesSurvey
Notes
Appendix2BankofEngland:Agents'Summaryof
BusinessConditions(January2014)
Appendix3Inflation:ContributionstoChangein
the12-MonthRate
Appendix4VotingonInterestRatesbythe
MonetaryPolicyCommittee–1997toJanuary
2014

Appendix5VotingonAssetPurchasesFinanced
withcentralbankreservesbytheMonetaryPolicy
Committee–March2009toJanuary2014
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Bibliography
Index
EndUserLicenseAgreement

List of Tables
Chapter2
Table2.1
Table2.2
Table2.3
Table2.4
Table2.5
Table2.6
Table2.7
Table2.8
Table2.9
Chapter3
Table3.1
Table3.18
Table3.19
Chapter4
Table4.1
Table4.2
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Table4.3
Table4.4
Chapter6
Table6.1
Table6.2
Chapter7
Table7.1
Table7.2
Table7.3

List of Illustrations
Chapter1
Figure1.1UKequitypricesriseasPMI'ssuggesta
strongeconomicrecoveryisunderway.
Figure1.2BondyieldsriseasPMI'ssuggesta
strongeconomicrecoveryisunderway.
Figure1.3SterlingrisesvsUS$asPMI'ssuggesta
strongeconomicrecoveryisunderway.
Figure1.4Sterlingrisesvseuroasmarketthinks
interestratesmayriseasgrowthpicksup.
Figure1.5RegionalUKeconomicactivity–PMI
balances.
Figure1.6CBIconfidencemeasurevsFTSE.
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Figure1.7Confidencevsinvestmentspending.
Figure1.8Confidencevsmanufacturingoutput.
Figure1.9Businessconfidenceleadssterlingvs

theUSdollar.
Figure1.10UKbusinessandconsumer
confidence.
Figure1.11LloydsBankBusinessBarometer
measuresfirms'confidenceagainstthe
performanceoftheFTSEAll-Share.
Figure1.12UKtrade-weightedexchangeratevs
BusinessBarometer.
Chapter2
Figure2.1Theworlduntil2000.2
Figure2.2AnnualGDPintheUKoverthepast50
years.
Figure2.3GlobalGDPgrowth(percent;quarter
overquarter,annualised).
Figure2.4Outputindicesbysector,UK.
Figure2.5UKchartbydifferentmeasures.
Figure2.6SummaryofstatisticsforQ42012
quarter-on-quartergrowth.GVA,grossvalueadded;
CVM,chainedvolumemeasure;CP,currentprices;
SA,seasonallyadjusted.
Figure2.7Grossoperatingsurplusof
corporations,%growth,quarteronquarter.
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Figure2.8Compensationofemployees,%
growth,quarteronquarter.
Figure2.9Manufacturinggrowth,%quarteron
quarter.
Figure2.10Servicesgrowth,%quarteron

quarter.
Figure2.11Householdfinalconsumption
expendituregrowth.
Figure2.12Grossfixedcapitalformationgrowth,
quarteronquarter.
Figure2.13Nettrade,£(billion).
Figure2.14Netlendingbysector(percentageof
GDP).PNFC,privatenonfinancialcompanies,
FINCO,financialcompanies,NPISH,non-profit
institutionsservinghousehold.
Figure2.15TheUKsavingratiohasnowrisen
afterfallingtozero.
Figure2.16UKhouseholddebtratiohasfallen,
buthasitfallenfarenough?
Figure2.17UKGDPdoeshaveagoodlinkwith
shareprices.
Chapter3
Figure3.1UKunemploymentrate(aged>16
years),seasonallyadjusted.
Figure3.2UKemploymentrisesevenasGDP
growthstaysflat,implyingfallingproductivity.
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Figure3.3Changesinemploymentsince2008.
Figure3.4Earningsgrowthincomparisonwith
priceinflation.
Figure3.5Nolinkbetweenunemploymentand
wageinflationovertime?
Figure3.6TheNAIRUsuggestthattheinflation

backdropisbenign.
Figure3.7UKlabourmarket.
Figure3.8Lengthofunemployment–period
endingFebruary2013.
Figure3.9Lengthofunemployment–
comparisonbetweenFebruary2003andFebruary
2013.
Figure3.10Longer-termdemographictrendsin
theUK,byage.
Figure3.11Working-agepopulation.
Figure3.12Growthslowingrapidlyinworkingagepopulation.
Figure3.13Unemploymentratebyage.
Figure3.14Youngpeopleinthelabourmarket.
Figure3.15Summaryoflabourmarketstatistics,
April2013.
Figure3.16Numberofclaimants(excluding
clericalclaims)byageandsexforMarch2013,
seasonallyadjusted.
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Figure3.17Unemploymentratebygender.
Figure3.20Howtheinactivitynumbersbreak
down.
Figure3.21Economicinactivityrate(aged16–
64),seasonallyadjusted.
Figure3.22UKlabourparticipationrate.
Figure3.23UKvacancies.
Figure3.24Employmentgrowthbyoccupation.
Figure3.25Employmentstatisticsbysector.

Figure3.26Publicsectoremploymentbyindustry
forDecember2012,seasonallyadjusted.
Figure3.27Hoursworked.
Figure3.28Unitlabourcostsandproductivity
(outputperworker).
Figure3.29Unemploymentratebyregion,
February2013.
Figure3.30UKunemploymenttrendssince
2000.
Figure3.31UKharmonisedunemploymentrate
in2011.
Chapter4
Figure4.1Priceindexovertime.
Figure4.2AhistoryoftheincreaseinRPI.
Figure4.3Changesingoodspricesexplainoverall
16


UKpriceinflation.
Figure4.4UKimportpricesvsgoodsprice
inflation.
Figure4.5UKCPIvsforeignexchangerate.
Figure4.6Cost-pushinflationasaresultofOPEC
increasingitsprices10-foldinthe1970s.AD,
aggregatedemand;AS,aggregatesupply;Y,real
output.
Figure4.7Demand-pullinflation–ariseswhen
aggregatedemandinaneconomyoutpaces
aggregatesupply.AD,aggregatedemand;AS,
aggregatesupply;Y,realoutput.

Figure4.8Averageearningsandconsumerprices
annualgrowthrates.
Figure4.9GDPdeflatorshowingpercentage
increaseinayear.
Figure4.10Factorygateoutputpriceinflation.
Figure4.11Factoryinputpriceinflation.
Figure4.12DifferencebetweenRPIandRPIJ,
percentageyearonyear.
Figure4.13GapwedgebetweenCPIandRPI.
Figure4.14InflationagainsttheBankof
England'sinflationtarget.
Chapter5
Figure5.1Long-termtrendsinbroadmoney
17


growth.
Figure5.2Thevelocityofmoney.
Figure5.3August2013CPIfanchart,basedon
constantnominalinterestrates.4
Figure5.4August2013GDPfanchart,basedon
constantinterestrates.55
Figure5.5Selectionofcentralbankpolicies.
Figure5.6Assetpricesandmoneysupply.
Figure5.7Moneysupplyandhouseprices.
Figure5.8UKmonetarypolicyistheloosestinits
history.
Figure5.9QEtransmissionchannels.
Figure5.10Velocityofbroadmoney(ratioof
nominalspendingtonominalbroadmoney

holdings).
Figure5.11M4extrendsince2007.
Figure5.12UKliabilitiesandassetsofthe
bankingsector.
Figure5.13Counterpartstobroadmoneygrowth
M4.
Figure5.14TheimpactofQEonthesizeofthe
UKcentralbankbalancesheet.
Figure5.15Quantitativeeasinghashadlittle
impactonUKgrowth.
18


Figure5.16Interestratesandinflation.
Figure5.17M4andinflation.
Figure5.18Thelonger-termrelationbetweenCPI
andM4.
Figure5.19UKM4broad(adjusted)vsnarrow
moneyM0.
Figure5.20NominalGDPgrowthisanalogousto
broadM4moneysupply.
Figure5.21Twelve-monthpercentagegrowthin
M4depositsbysector.
Figure5.22Twelve-monthpercentageincreasein
M4lendingbysector.
Figure5.23Thevalueofdepositsandlendingin
theUKoverthe2012–13.
Figure5.24M4andUKeconomicgrowth.
Chapter6
Figure6.1AhistoryofUKdebtfrom1692to2011

(publicsectornetdebt).
Figure6.2UKdebthasrisensharplysince2000.
Figure6.3RealGDPgrowthvsgovernmentdebt
toGDPratio.Higherdebtratio,slowergrowth.
Figure6.4NewregulatoryframeworkattheBank
ofEngland.FPC,FinancialPolicyCommittee;FCA,
FinancialConductAuthority;PRA,Prudential
RegulationAuthority.g
19


Figure6.5Majorstatutorydecision-making
responsibilitiesoftheBankofEngland.Forfurther
detailontheSpecialResolutionRegime,see
www.bankofengland.co.uk/financialstability/Pages/role/
www.hmtreasury.gov.uk/d/fin_fs_bill_mou_financial_crisis_ma
Figure6.6MembershipoftheBankofEngland
bodies.
Figure6.7UKinterestpaymentsonthe
governmentdebt.
Figure6.8UKdebthasmovedupsharplybutis
stillbeloweuroaverage.
Figure6.9UKupthedebtranking?
Figure6.10UKgovernmentdebtcomparedwith
othercountries.
Figure6.11UKbudgetdeficitwillimproveonly
slowly.
Figure6.12Itwillbehardtocutgovernment
spending.
Chapter7

Figure7.1ExportsandimportsasashareofUK
GDP.
Figure7.2UKcurrentaccountbalanceasaper
centofGDP.
Figure7.3UKtradeinservicesandgoods.
Figure7.4Investmentincome:creditslessdebits.
20


Figure7.5Currentaccountdeficits
internationally.
Figure7.6UKexternaldeficitwidensfurtherin
2012.
Figure7.7Achronicdeficitistradeingoodsbuta
surplusinservices.
Figure7.8Changesininvestment.
Figure7.9Thetransfersdeficitworsened.
Figure7.10Thesurplusonthefinancialaccount
isnecessarytofundtheUK'scurrentaccount
deficit.
Figure7.11Astructuraldeficitingoodsisnot
quiteoffsetbyastructuralsurplusinservices.
Figure7.12UKtradepositionbyregion–Europe
ourbiggestmarket.
Figure7.13UKexportsbycountry(percent).
Figure7.14UKvisibleexportsbycountry
(£billion).
Figure7.15UKvisiblegoodsimportshares(per
cent).
Figure7.16UKvisiblegoodsimportshares

(£billion).
Figure7.17UKvisiblegoodsexports.
Figure7.18UKserviceexports.
Figure7.19UKexchangerate–doesitneedto
21


weakentohelpexports?
Chapterfintro
FigureI.1USdatasurprisevsUSequities.
FigureI.2JapanesedatasurprisevsJapanese
equities.
FigureI.3G10datasurprisevsJapaneseequities.
FigureI.4G10datasurprisevsUKequities.
FigureI.5UKdatasurprisevsUKequities.
FigureI.6ChinesedatasurprisevsChinese
equities.
FigureI.7G10datasurprisevsChineseequities.
FigureI.8USinflationsurprisevs10-year
nominalyields.
FigureI.9USinflationsurprisevs10-yearbreakevenrate.
Chapterp05
FigureA5.1UKbankratesince1694anditwould
gobelowthevotingrecordMarch2009toJanuary
2014.

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Acknowledgements

Thankyoutoallofthepeopleinvolvedinwritingand
producingTradingEconomics.Specialthanksmustgoto
friendsandfamily.Withoutyourenduringsupport,this
journeywouldhavebeenfarmoredifficult.
June2013

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Introduction
Today'sinterconnectedworld,linkedbyfreertrade,by
someofthegreatestmovementsofpeoplethrough
tourismandimmigrationtheworldhaseverseen,bythe
movementofgoodsandservices–allunderpinnedby
newmethodsofopencommunicationthatwere
unimaginableagenerationorsoagoandinvolvingmore
countriesthaneverbefore–meansthatanunderstanding
ofeconomicsmattersmorethanever.Itisnosurprise,
therefore,thatheadlinesscreameconomicnews,
newspapersarefullofstoriesbasedonstatisticsabout
economicperformancewithinandamongstcountries,
governmentofficialsareconstantlydiscussingthe
economyandtherearepundits,radioandTVshows,some
broadcasting24hoursaday,with‘experts’claimingto
knowallsortsofthingsbasedoneconomicdata.Then
therearealltheblogs,tweetsandinternetmediachannels
toaddtothemixture.Withthecacophonyofnoisefrom
thesemedia,itisincreasinglyhardtodiscernthe
underlyingeconomictrendsfromwhatareoften
conflictingdata.

Whathasallowedtoday'sworldtocomeintobeingisa
beliefthatmoretradeisbetterthanlesstrade,that
producinggoodsandserviceswhereitischeapesttodoso
allowsforariseinlivingstandardsforallconcerned
(thoughnotalltothesameextent).Thisoutcomeisbased
ononeofthefundamentalelementsofeconomic
rationale–thedivisionoflabourandcomparativetrade
advantage.Whatiseconomicsabout,ifnottheproduction
ofgoodsandservicestosatisfyhumanwantsandneeds?
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Itistheacceptanceofthisnotionacrossmanysocieties
aroundtheworldthathasgivenrisetotheexplosive
increaseinglobalwealththathastakenplaceinthelast
50yearsandthatweseeallaroundus.
Thisiswhyanunderstandingofeconomicstatisticsand
whattheymeaniscrucial.Thesestatisticsarethebasis
forindividual,corporateandcollectiveorsocietal
decision-making.Governmentsuseeconomicstatisticsto
planspendingandpolicy;companiesusethemtodecide
whenandwheretoproducegoodsandservices;investors
(includingpensionfunds,insurancecompanies,
individualsetc.)usethemtodecidewheretoputtheir
wealth;andhouseholdsusethemtodecidewhentobuy
orsellgoodsandservices.
Thesedatadrivetrendsinthefinancialmarkets.Without
theconstantdripfeedofeconomicnews,marketstendto
drift.Whattheyawait–whattheyinfactneed–isthe
nextpieceofnewinformationtojoltthemintoaction.

Theexperienceofrecentyearshastaughtusthatfinancial
marketsdonotinhabitaseparaterealm,detachedfrom
the‘realeconomy’.Farfromit–financialmarketsare
fundamentallytetheredtotherealeconomy.Theyhavean
impactonusall.Thatiswhytheymatterandwhy
understandingthedatathatdrivesthefinancialmarkets
willsupporttradersandpractitionersinreadingthe
marketsmorecomprehensivelyandframingtheirown
reactionsaccordingly.

SURPRISE INDICES
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