Quarterly Bulletin
Aggregate Demand Articles

Measuring market sector activity in the United Kingdom (550k)
(By Rohan Churm, Sylaja Srinivasan and Ryland Thomas of the Bank's Monetary Analysis Division, and Sanjiv Mahajan, Fenella Maitland-Smith and Geoff Tily of the Office for National Statistics (ONS)). A measure of private or market sector activity is useful for assessing demand pressures and productivity trends in the economy. This article discusses the practical issues involved in constructing a measure of the market sector's gross value added (MSGVA) for the United Kingdom. It looks at the existing estimates currently constructed by the ONS and the Bank of England using National Accounts data, and discusses how the Bank of England uses these estimates when analysing demand pressures in the economy.

UK export performance by industry (757k)
(By Ana Buisán of Banco de España and David Learmonth and María Sebastiá-Barriel of the Bank of England's Monetary Analysis Division). The United Kingdom's export market share has declined steadily for a number of years, both in aggregate and in many industries within the manufacturing sector. A major determinant of demand for an industry's exports is the price of those exports relative to the prices of international competitors. This article shows that UK export prices tend to follow the prices set by foreign competitors quite closely, when expressed in a common currency. So, for many exporters, a dominant depressing influence on market share over the past decade was the significant appreciation of the sterling exchange rate in the late 1990s. But other factors also played a role. In particular, a number of high-tech UK industries have been able to increase their market shares, perhaps reflecting a greater ability to differentiate their products from those of their competitors.

House prices and consumer spending (410k)
(By Andrew Benito, Jamie Thompson, Matt Waldron and Rob Wood of the Bank's Monetary Analysis area). This article explores the complex relationship between house prices and consumer spending. It explains that the strength of the relationship can vary considerably over time. And it highlights the key roles that both common factors and causal links have played in the weakening association between house prices and consumer spending in recent years.

Investing in inventories (268k)
(By Rob Elder and John Tsoukalas of the Bank's Structural Economic Analysis Division). As well as investing in capital, firms invest in inventories or stocks. For some businesses, investing in stocks is crucial for their profitability. Shops are better able to attract consumers if their shelves are full and they can offer a wide variety of products. Manufacturers are more likely to win contracts if their customers can trust them to cope with sudden swings in their orders by holding sufficient stocks. Nevertheless, investment in stocks is actually a very small proportion of total spending in the United Kingdom. On average between 2000 and 2005 it was just 0.4% of GDP. But it is volatile. For example, annual GDP growth slowed from 3.1% in 2004 to 1.8% in 2005. Weaker investment in stocks can account for 0.4 percentage points (or a third) of that slowdown. This article examines firms' motives for investing in inventories in order to understand the role it plays in swings in whole-economy output.

The impact of government spending on demand pressure (360k)
(by Bob Hills and Ryland Thomas of the Bank’s Structural Economic Analysis Division and Tony Yates of the Bank’s Monetary Assessment and Strategy Division). When assessing the outlook for inflation, the growth of real GDP is commonly used as an indicator of changes in current demand pressures. But as GDP includes the output of the government sector, this approach can in some circumstances be misleading. Government output is not necessarily an informative guide to the impact of government spending on the balance of demand and supply pressures in the marketed sector of the economy. Instead, it may be more informative to consider the quantity of resources that the government absorbs - that is, how much private sector output it buys and how much labour it hires - rather than the quantity of output it produces.

The main aim of this article is to assess whether the data on bank and building society lending to private non-financial corporations (PNFCs) and households contain information that could improve our understanding of the links between monetary policy and aggregate demand.

The article demonstrates that it is possible to estimate relationships that explain lending to firms and households, and that lending is driven by the same factors that drive the more intensively researched categories of money demand, consumption and investment. The results have improved our understanding of the links between money and credit and the spending decisions of households and firms. There do appear to be significant interactions between lending to firms and households, and money, consumption and investment. The estimated system of equations potentially gives a framework that helps us to interpret the likely impact of observed credit growth on future spending. These estimates are tentative and require further empirical verification. Notwithstanding these reservations, channels that involve credit as well as money balances appear to matter for the transmission mechanism of monetary policy.