“Slack” is increasingly becoming the buzzword from central bankers, politicians and forecasters alike but estimates vary considerably and in the UK the BOE is most definitely split on just how much slack there is and how long it will take to move to an acceptable/appropriate level, if indeed one exists.
The Independent runs a piece today that highlights this key problem and says
The trouble is that economic slack can’t be directly measured. Its size can only be inferred from other indicators. And those indicators are rather unsatisfactory, generally consisting of surveys of firms and workers. To put it crudely, policymakers have to guess.These guesses are contentious because of what happens if they are wrong. The Bank of England’s latest collective estimate is that economic slack is about 1 per cent of GDP. But what if spare capacity is bigger than this? That implies the Bank could hold interest rates down for longer than the financial markets expect.
That would result in faster growth, which would not be excessively inflationary. That, in turn, should mean faster wage growth. The Bank could harm living standards unnecessarily by tightening monetary policy prematurely.
It concludes
There is no easy solution to this. Policymakers will always need to estimate the output gap. And disagreement about which indicators to study, and which to ignore, is inevitable. There is bound to be disagreement, too, over the potential growth rate. Pessimism will always vie with optimism. One can only hope that policymakers and forecasters produce their estimates with an appropriate level of humility and open-mindedness
No rocket science in the article but it does help to highlight why the heated debate on interest rates and wage growth continues
Full article here
