12 Dec 2012

Carney’s recent musing on UK jobs and housing bubbles

Mark Carney is rightly in the news for giving a speech last night called “Guidance”.

It strongly supports the impact of his pre-warning of a period of low interest rates, known as the “conditional commitment”. But it also points to the logic, during a period of extended low interest rates, to a so called “nominal GDP” target. Such a target implicitly accepts higher inflation, at a time of low growth.

Firstly, I don’t think he’s the only person in the UK economic establishment at least pondering this as I wrote in September.

Second, nominal GDP targeting may more accurately reflect what the BoE has already been doing sotto voce for three years. Thirdly, I restate my surprise, made in the initial “Carney-val” euphoria, that some hardcore inflation nutters are so welcoming of an appointment, which, all things equal, will mean lower rates for longer.It seems even more relevant now.

I’ve also dug out Mr Carney’s most recent comments on the UK, made six weeks ago during parliamentary testimony in Ottawa, before he was appointed as Sir Mervyn King’s successor. The UK jobs market merits the word “unfortunately”.

“Obviously, within continental Europe, the G7 countries, and unfortunately in the U.K. as well, the pace of job creation from recession troughs has been quite slow, and the quality has been beneath that found in Canada,” he said on 30 October having referred to a large number of “involuntary part time” jobs. He pointed out that Canada’s jobs recovery had been strong, high wage and the vast majority full time. “The quality of job creation has been high,” which is clearly not what he thinks about UK (and the US and Europe).

Will today’s positive jobs numbers, including falls in overall and youth unemployment change his mind? I have my doubts. More relevantly, what chance him raising interest rates – at any time during his five year tenure – given the sluggish picture in UK, given that he did not in Canada?

Even more interestingly, from that six-week-old Canadian parliament transcript, are his support for efforts made to actively calm a housing bubble.

“Mr. Mark Carney: We have welcomed the moves the government has taken on reducing amortization, increasing down payments, effectively raising the credit scores, reducing and effectively eliminating the ability to access mortgage insurance for refinancing and for investment properties. These measures as a whole are contributing to a more sustainable development of the housing market here in Canada, and we welcome them.”

So reducing incentives for buy-to-let in Canada. Mr Carney will find a contrast when he arrives at the Old Lady, that the Bank of England/ Treasury Funding for Lending Scheme is actually being used to subsidise buy-to-let mortgages by state-owned banks.

Not just that, he strongly implies that US QE3 is designed to at least partially to weaken the US dollar. Yet, he thinks the Canadian economy will be boosted if firms “take advantage of the strong Canadian dollar to buy machinery and equipment”.

Oh, and on the euro crisis’ ultimate resolution: despite progress “it will take years”. Well worth a full read of that transcript.

Follow Faisal Islam on Twitter: @FaisalIslam