Tuesday, 10 November 2015

Interesting details from the OECD

Last night the OECD came out with the latest update to its Economic Outlook - you can read the whole thing here (the chapter on New Zealand starts on p189) and access the statistics behind it here.

There were no huge dramas in the commentary: keep fiscal policy on a conservative course, loosen monetary policy some more (the OECD expects the official cash rate to drop to 2.25%), watch out for the Auckland housing market, do something about easing Auckland housing supply.

But the detailed numbers were nonetheless interesting. Here's a selection.

On the GDP front, 2016 could be tricky: forecast 1.9% growth doesn't leave much room for error if, say, China or El Niño spring an unpleasant surprise. And you do wonder about where longer-term growth is going to come from if (as the OECD thinks) the housebuilding boom loses its oomph. Investment in non-housing capital goods growing at only 2.0-3.0% a year isn't doing much to increase our productive capabilities.

And that's where we get to the more interesting numbers. The OECD's got an estimate of how fast our economy can grow (the 'potential output' line). Sure, these potential output 'speed limit' calculations can be flakey, but that said, on its face the news is not good. Our current potential growth rate of 2.5% is not flash, and is likely to fall a bit over the next couple of years. One or more of labour force growth, capital investment, or productivity has got to start picking up if we're not going to be lumbered with growth rates a lot lower than we'd like.

You can also see how the OECD gets to its case for easing monetary policy. Forecast inflation is below the RBNZ's target mid-point, the economy is operating below full capacity (that's the 'output gap' line), and the forecast unemployment rate is above the 'NAIRU' level where (in theory) a tight labour market would start to generate wage pressures. NAIRU estimates are just as iffy as potential output, and on nothing more than hunch I'd say the NAIRU could be lower than the OECD thinks, but either way there's clear room for monetary policy ease.

I've put up the financial markets forecasts for reference. Recent history, home and away, of forecasting interest rates and exchange rates has not been, um, a complete success, but in any event short term rates are headed down as the RBNZ cuts, and the dollar eases a little, but longer term rates are heading north: the driver is the US bond market, where the OECD expects the long term bond yield to rise from 2.1% this year to 3.2% in 2017.

1 comment:

  1. The surprise is probably that they aren't picking more of an OCR cut. Even after the OCR goes to 2.25% next year the output gap in 2017 remains materially negative and the unemployment gap doesn't narrow much. But they will have been reluctant to forecast much away from the authorities, in a country where we do publish policy rate forecasts.