<>Listener: 27 August, 1994.
<>Keywords: Macroeconomics & Money;
Should we be amused or amazed at the confidence of some economic commentators? While serious analysts struggle to understand what is happening, and what happened in the past, the prima donnas tell us, with a certainty only belied by their consistently poor forecasting record.
Such gloomy thoughts assailed me while recently reviewing the measurement of GDP – the total market production of the economy. The two ways of measuring GDP reflect the two sides of the market. It can be calculated by what was produced, or by where production is used (expenditure). They measure the same thing, and should give the same total. As the Government Statistician has reluctantly announced, they dont. But with a bit of fiddling around, the two series describe the same business cycle in recent years.
The economy was near stagnant through 1989. One GDP series shows a mild expansion, the other a decline. Both begin contracting in early 1990, hitting the bottom in mid 1991. The production series gives a mild uplift over the next four quarters, while the expenditure series bumps along the bottom. By mid 1992 both series show a strong upswing.
The meaning of this pattern is a matter of debate, most recently in the Auckland Herald with Keith Rankin and Susan St John from Auckland University on one side, and Roger Kerr of the Business Roundtable on the other. Kerr claims the current expansion is the result of following his prescription of getting the government deficit down and the Employment Contracts Act (ECA) up. He criticized those economists (including this columnist) who in 1991 cautioned against drastic budget deficit cutting on a weak economy.
Confusion arises because neither side in 1991 expected the deficit blowout of the 1991/92 year of over $3 billion, probably the largest real (inflation adjusted) deficit in our history. The extra expenditure injections from the government were surely a major factor in the beginning of the upswing. Happily, as in the more sophisticated Keynesian prescriptions, the growth generated the tax revenue which has swung the government accounts into surplus.
What about the ECA? There is little systematic evidence to show that it has been beneficial to macroeconomic growth. Recent gains in labour productivity are normal at this stage of the business cycle. When I went back to the 1991 parliamentary debate, in an attempt to identify a prediction which would be unique for the ECA, I found the confident promise that the ECA would do for New Zealand what Fortex had done for the meat industry.
The alternative view points to the deliberate depreciation of the exchange rate in 1991, made possible – so the Reserve Bank tells us – by the very restrained wage path which the Labour Government negotiated with the unions in late 1990 (something impossible under the ECA). The more favourable exchange rate enabled export expansion, while the world economy was depressed.
More recently the exchange rate has appreciated. But now exporters are benefitting from strong world growth, especially in Australia. Additionally export prices relative to import prices are up in the last two years, offsetting their fall in the previous two.
Beyond interpreting the past is the question of the future. Leaving aside the overconfident without analysis, there are currently two main views. The “optimists” think the economy is capable of a sustainable real GDP growth rate of around 3½ percent a year, which would have us growing at about the same rate as the OECD. The pessimists expects GDP to grow closer to 2 percent a year in the long run.
Their key differences arise from:
– to what extent export growth can generate sufficient foreign exchange to fund the internal expenditure. A lot of New Zealand exports are biologically or otherwise constrained in the medium term, so faster growth places a great burden on general manufacturing and tourism. The (optimistic) Treasury forecasts have “non-commodity manufacturing” doubling every three years;
– to what extent the economy has the capacity for production: skilled labour, public infrastructure, export market development, and firm’s production equipment.
There is also a worry that export prices for dairy and meat products will be depressed by dumping before the GATT round gets implemented.
Even had we an adequate data base it is extremely difficult to project an underlying trend five years out using little more than five quarter’s data. Some economists may behave as though they are omniscient: statisticians know why they are not.
We may be sure that thoughtful analysis will be given less prominence than hysterical pessimism or optimism. There are no headlines in reporting a commentator is not sure, or that on the balance of probabilities one is pessimistic (as I am over our GDP prospects). Nor are those who express doubts about current economic developments likely to be rewarded by those who advocate current policies, even if – as happened in the past – the analysis proves more correct.