Fixed Income 

M&G’s Woolnough: UK output should be higher

The Bank of England risks making policy errors by relying too much on a flawed GDP number, according to M&G’s Richard Woolnough.

Speaking at an M&G Bond Vigilantes event this morning, Mr Woolnough, who runs £27bn across three fixed income funds, said the current figures for the UK’s economic output should be “15 per cent higher” when compared with the data’s long term relationship with employment.

“The relationship between employment and GDP has broken down,” the manager said. “There are now the same number of people in work as there were in 2007 yet output is 5 per cent less.

“This means those people are 5 per cent less efficient and that doesn’t fit with productivity and changes in technology in the past five years. GDP should be 15 per cent higher than it is - the numbers don’t stack up.”

Mr Woolnough demonstrated that employment figures historically have been a leading indicator of economic output, but since the 2008-09 recession the employment rate has improved much stronger than economic output.

He added: “If the data is rubbish then you make policy mistakes. The Bank of England is keeping interest rates low thinking that the economy is really weak, and therefore it will get a surprise with higher inflation.”

The Office for National Statistics earlier today announced that GDP figures from the beginning of last year had been revised upwards, meaning the UK never experienced the double dip recession as was initially believed.