Thursday, 24 August 2017

In the undergrowth of the Prefu

The Pre-election Economic and Fiscal Update - the 'Prefu' - came out yesterday when I was away giving some expert evidence at the Board of Inquiry into the proposed East-West Link motorway in Auckland. You've probably got the big picture about the Prefu already - if not try the ever reliable Rob Hosking's 'Joyce unveils rosy pre-election economic update' in the NBR (probably $, and worth the sub) - but now that I've read it, here are some additional perspectives.

There's an interesting difference of opinion between Treasury and the Reserve Bank about the outlook for interest rates and the Kiwi dollar. For Treasury, "The Official Cash Rate is expected to begin rising in mid-2018 as the Reserve Bank seeks to achieve its objective of stabilising inflation at the 2.0% mid-point of its target range. From around 2.0% in June 2018, short-term interest rates are forecast to rise to around 3.8% in June 2021" (p20 of the Prefu). For the RBNZ, as it said in Table 2.1 on p11 of the latest Monetary Policy Statement, the OCR is going to stay where it is all the way out to late 2019. For what it's worth, the financial markets (going by current futures pricing) lean more Treasury's way.

The difference on interest rates feeds into different views of where the overall value of the NZ$ is heading. As shown below, the Bank has it peaking around now and then going on a progressive slide, whereas Treasury (in Table 2 of the 'Additional information' bit of the Prefu) have it rising a little more and then staying there.

Another thing to note is the scale of the fiscal boost to the economy. The headline numbers on fiscal surpluses don't tell you much about whether tax and spending plans boost or brake the economy: instead, the 'fiscal impulse' is a go at figuring out what fiscal policy is doing, once you've stripped out all the cyclical things that happen to the fiscal books (like good times boosting the tax take, as they are now).

Estimates of the impulse are always iffy, although other sighting shots at it have come up with much the same as Treasury's. Here it is (again from the 'Additional info').

After years of grinding away at rebuilding the state's coffers - six successive years of tighter fiscal policy - it's now all systems go, with a fiscal boost in the year to June '18 amounting to some 1% of GDP, plus a bit more the following year. People will have all sorts of reactions to that, from a cynical quelle surprise in election year, to why not address some real needs now that the money's more available (the Family Incomes Package is in that boost).

Dull and boring macroeconomists however are likely to say that loosening fiscal policy in good times - 'procyclical' policy as we call it in our game - isn't usually the best of plans, though I'm prepared to cut some slack when some of the boost also addresses our infrastructure shortfall.

The final thing worth digging out of these fiscal updates is the outlook for profits. New Zealand's a bit short on profits data: Stats are working on it, but we don't yet have quarterly profits numbers, unlike for example Australia, the UK or the US. So anything that throws some light on what is one of the key moving parts in a market economy is always welcome. That's where Table 3 in the 'Additional info' comes in handy, as it has forecasts for 'operating surplus, net' (profits, essentially) for both agriculture and the rest of the economy.

They're only annual, but it all helps. Here's what the numbers look like (percentage changes aren't in the original table, so I've added some).

Down the farm you can see the huge impact of the recovery in dairy prices from their previously dire levels. Elsewhere it's not been the profits bonanza you might have expected from such a decent run for the overall economy - another part of our productivity paradox, perhaps? 

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