Carney’s blind bet

Not many people grasp just how bad the UK’s recession has been. It hasn’t felt quite as bad as it should, thanks to the ultra-low interest rates that have kept the wolves from many doors, and a bout of inflation that temporarily disguised falling real wages.

But it is worth remembering that the Great Depression ran for 42 months, while we have been mired in our own misery for 60 months.

The good news, as we said a few months ago, is that when you have a very nasty economic slump, you tend to get a fabulous rebound.

When Bank of England governor Mark Carney introduced the idea of ‘forward guidance’ back in August, he said he would start looking at raising interest rates when unemployment hit 7%, which he expected to happen in 2016.

We weren’t convinced: we said we expected unemployment to fall and hence rates to rise rather faster than the Bank did.

So far that’s been a good call. Unemployment in the UK is now down to 7.6% of the economically active population – or just 7.1% if you look at the one-month rather than the rolling three-month numbers. Carney now thinks we will hit 7% 18 months earlier than he had previously thought.

But while, on the face of it, this might suggest you should plan for the first rate rise (fix that mortgage!), remember that none of this is set in stone. That’s largely because we don’t really understand the UK unemployment numbers.

Unemployment rose post-crisis but by nowhere near as much as the Bank expected. But output and productivity (a measure of how efficient the work force is) fell rather more than expected.

We also know that huge numbers of people – two million – are underemployed. They are in jobs, but aren’t doing the hours they want to do. So you could say that what really matters is not employment itself, but two other numbers – under-employment and productivity.

If both improve, then unemployment can only come down slowly – if the staff already on your payroll work better and for longer, you don’t need to hire to raise output. If they don’t, employment will rise as demand does.

So Carney has made more of a bet on productivity than anything else. And if there is one number in the UK economy no one can quite get to grips with, it is productivity. Why did it fall? What might make it go up? We all have ideas, some more polite than others. But no one really knows.

We said from the start that forward guidance seemed a pretty dim-witted policy. Based as it is on a number no one understands, we still think it is. It tells us nothing about when rates will actually rise – it may be 2014, but if it is, the bare unemployment numbers won’t be the trigger.

I have met Mr Carney since I last wrote about forward guidance. He seemed nice. But we instantly found something to disagree on (the impact of changes to executive compensation on economic growth, in this case). That at least is, I think, a trend we can be sure will continue.