Friday, 27 May 2016

Overoptimistic Budget forecasts?

My post yesterday about the Budget concentrated on what I thought were some of the key higher level issues. But perforce you can't cover everything, and I didn't spend any time on whether Treasury's economic forecasts looked plausible or not.

Reading the various Budget commentaries that have come out since, however, apparently it's an issue that bothers some folk. So in an effort to clear the air, here's a table that compares Treasury's main forecasts (finalised on April 13) with the latest set of consensus forecasts collated by the New Zealand Institute of Economic Research (published on March 14). I've made them a bit more comparable by using Treasury's March year forecasts, rather than the headline June year forecasts in the Budget, and which are available on p138 of the Budget Economic and Fiscal Update: this matches the March years used in the consensus forecasts. There are still differences between them (eg some March quarter compared with full March year numbers), but they make no real difference. The Treasury set go out a year further than the consensus does.


My conclusion? They're not identical twins, but they're clearly describing the same economy. Treasury's got a slightly stronger GDP track, and when you unpack it and look at the more volatile components of GDP (house construction and exports), you find it's down to Treasury expecting a bigger and longer burst of housebuilding than the consensus did, and they could well be right.

There may well be a timing element involved, too. The set of consensus forecasts was collated after a very rocky period for global markets in January and the first half of February, when people had been anxious over the prospects for global economic activity (and particularly over China), and this may have helped produce a slightly weaker GDP outlook compared with Treasury's set, which had the benefit of seeing markets recover confidence in March.

But these are marginal points around the edges. For all practical purposes the Treasury forecasts aren't meaningfully different from the consensus. There's the odd item I'd quibble with - I wouldn't be surprised, for example, if Treasury's expected drop-off in net migration didn't materialise to the extent they think it will - but overall there's not a lot of evidence that Treasury's forecasts are idiosyncratically off the mark or systematically biassed.

And if you've still got some "smoke and mirrors" conspiracy view of the Budget numbers and projected surpluses, as I mentioned yesterday the overall picture of the fiscal position gradually moving into growing surplus comes through even when you use the alternative, lower growth scenario that Treasury also modelled in the Budget documents.

5 comments:

  1. Michael Gordon27 May 2016 at 18:39

    Donal, you might feel like you've been reading this a lot because we (Westpac) got our review out quickly and ended up nabbing a lot of the media coverage. And our growth forecasts in the outer years are a lot lower than consensus, let alone Treasury. As for why they're so low - mostly we've been emphasising the wind-down of the Christchurch rebuild (and I see that the consensus forecast for residential investment is a lot lower than Treasury's, so we're not entirely alone on that front).

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    1. Thanks Michael (and apologies for slow reply, I was away all weekend on a course). I wasn't taking issue with your view specifically, BTW, but more the 'usual suspects' list down one end of the political spectrum: my main point was that Treasury's view wasn't that far away from the mainstream. That said, I'd certainly agree (at a minimum) that the risks are to the downside, and if you folks were minded to put some figures round a plausible Canterbury wind-down and the Auckland wind-up and show us what the overall aggregate looked like (if you haven't already - I may have missed it) I'd be v interested.
      Incidentally that Irish net migration modelling I mentioned had (from memory) a threshold effect in it - if the unemployment rate differential between the UK and Ireland was modest (I seem to remember <4%), people didn't bother moving, which makes sense, but they did when it was bigger than that

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    2. Michael Gordon1 June 2016 at 23:36

      No worries, I didn't feel like you were having a go at our view. Our latest economic overview (link below) has a chart of our construction forecasts, including the rebuild aspect. We've gone into the rebuild profile in more detail in some past reports, but I'd have to do a bit of digging to find it.

      www.westpac.co.nz/assets/Business/Economic-Updates/2016/Bulletins-2016/Westpac-QEO-May-2016_EMAIL.pdf

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  2. Michael Reddell27 May 2016 at 20:52

    Fair point Donal but Tsy does still have higher GDp growth throughout, and over recent year Tsy and Consensus have been overly optimistic. (I know it doesn't show at a 95% significance level in the recent Tsy forecast error report, but that is partly a small sample problem.)

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    1. Thanks Michael and as I said to Michael Gordon (above) apologies for slow response, I've been away. I had a look at that forecasting report (and thanks for mentioning it, I missed it in the Budget hubbub) and yes, there does seem to be some overoptimism over the longer time horizons (and no, I'm not worried about the 95% either). Suggests, maybe, they have too high a view of potential output growth?

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