Inside the consensus

The consensus economic forecasts collated by the New Zealand Institute of Economic Research (latest one here) are a remarkably useful tool.

The overall picture from the latest one makes a fair deal of sense, with ongoing growth expected of about 3% a year. In per capita terms, allowing for population growth of say 2% a year, it's not outstanding, but at least the current cyclical expansion, which started back in early 2011, has still got legs.

We've got fiscal policy delivering a decent-sized (and pro-cyclical) boost to the economy, monetary policy is also supportive, the world economy is showing every sign of strengthening, as you can see from the latest forecasts from the big multilateral organisations (the OECD's is here) and from global business surveys such as the J P Morgan / Markit one, and at home we've got, I reckon, fairly strong wealth effects from the national rises in house values.

The consensus numbers themselves are obviously of interest in their own right - and over time are likely to prove better than any individual forecaster's - and it's good to know that on the latest consensus view we are in for further economic growth, a falling unemployment rate, modest inflation, and the fiscal books in good shape. But the most interesting things, for me, lie in the fine detail of the outlook rather than the consensus numbers themselves.

First thing I always check for is revisions to people's thinking: that's because it's surprises that tend to move markets, rather than the eventuation of the widely anticipated, which tends to be already baked in. This time round, there's not a lot of change to the expected GDP track compared to what the forecasters thought last December: no joy, then, for the equity markets which might have been looking for some signal of stronger than expected corporate profitability.

The second thing I look for is where there is most uncertainty or disagreement amongst the forecasters. This time round (as it has been before) the key moving part is housebuilding.

At one extreme we've got the view that we'll have trouble even maintaining the current volume of house construction - the most pessimistic view is that it'll ease off a little as Auckland new builds don't fully compensate for the rundown of the Canterbury reconstruction - and at the other we've got the view that we are off to the races, with substantial increases in coming years. Presumably that view is some combo of a judgement that the Auckland building trades are not at full capacity and that KiwiBuild kicks in big and early. Can't say I see strong evidence for being down the gung-ho end of that spectrum.

One oddity is the reasonably modest consensus outlook for non-residential investment. You'd wonder why - if we're reaching labour market capacity constraints, as we may be - businesses aren't splurging more on gear, especially as the Kiwi dollar is reasonably high (the bulk of our capital gear is imported) and (to the degree that investment is interest-rate sensitive) financing costs are at unusually low levels. We're also starting from a position where we're not hugely equipped with gear in the first place: one researcher has calculated that we could close 40% of our productivity gap with Australia if our workforce had the same level of capital equipment as theirs.

I also wonder about the implied rates of productivity growth in the consensus outlook. In the year just finishing, GDP growth is expected to have been 2.9%, and employment growth 3.0%, which means that labour productivity will have declined a smidgen. But in the March '19 year, on the consensus view GDP growth will be 3.1% and employment growth will be 2.0%, so labour productivity will rise by 1.1%, and there are 1.7% and 1.5% productivity gains expected in the following two years as well. I'd love to see it happen, but right now I can't see what the mechanism is that will get our productivity performance improving so much so soon.

And maybe I'm cynical, but in our political system I simply don't see how fiscal surpluses will be allowed to grow and grow, from $2.7 billion now to an expected $5.7 billion in three years' time. Three billion more of the folding stuff available - I'll be mightily surprised if it withstands the clamour for increased spending.

Lies, damned lies, and Irish statistics

In March, Ireland's statistical agency, the Central Statistics Office (CSO), estimated that Ireland's GDP had grown in real terms in 2015 by 7.8%.

Yesterday the CSO came out with a revised estimate. It now says that Ireland's GDP in 2015 grew by - wait for it - 26.3%.

This is both absurd, and yet technically correct. Absurd, because as the Irish Times commentary headline put it, 'Crazy growth figures bear scant relationship to reality'. Yet technically correct, because the CSO says it follows the methodology of the "European version of the current UN mandated international standards for national accounts statistics, the System of National Accounts (SNA) 2008". And there's nothing wrong with doing that: our own Statistics NZ uses the same UN approach (details here if you're ever looking for them).

What's actually happened is that, for assorted tax reasons, over a short period of time in 2015, a number of international companies shifted the domicile of patents they own, or aircraft they lease, or their own corporate domicile, to Ireland. And, apparently, if you apply the standard national accounts methodology to those transactions, you get 26.3% GDP growth. I say "apparently" because the logic of some of the accounting escapes me, but let's take it at face value that the Irish statisticians cranked the right handles and out came the "right" UN-consistent answer.

There is now, as you can imagine, a big barney going on in Ireland about the reliability of the GDP statistics and how can people tell how the economy is actually behaving, but I was struck by two other thoughts.

One was the complete absence of any helpful explanation from the CSO. Here is the complete text of their statistical release.

Is there any attempt to reconcile their earlier 7.8% stab at it with the new 23.6%? No. Is there anything helpful at all about what actually drove the new results? No. Nothing. Zip. Nada.

Or in Irish, neamhní, faic, dada, rud ar bith*.

The relevance to us in New Zealand is that there's been a bit of a debate, here and overseas, about how far statistical agencies ought to go in providing analysis or commentary on the statistics they produce. Statistics New Zealand, I'm pleased to say, is down the right end of this debate, and goes some way to help users understand what's going on.  As an example, the commentary on the latest GDP release, for the March quarter, told us that "The anticipated El Niño weather pattern was not as severe as expected. The normal seasonal fall in milk production was less pronounced than usual, resulting in seasonally adjusted volumes of milk produced increasing slightly", which is helpful when you're trying to make sense of the agricultural production component of GDP.

We don't want Stats to veer off the reservation into opinion or editorial, but we most certainly do want them, at a minimum, to keep up the level of explanation they currently provide. As for the CSO, it badly needs to develop some customer focus and join the 21st century**.

The other thought I had was the silliness of some media and financial market reactions to small changes in GDP from what they had expected. As the Irish example has inadvertently reminded us, GDP is an estimate, a more or less rough stab at the aggregate level of economic activity. It comes with various kinds of measurement and survey error, and has complex and debatable inbuilt assumptions, and not just the Irish ones around intellectual property and official domicile. The measurement of the output of the financial sector, for example, is a contentious issue.

Our latest official stab at GDP growth for the full year to March is 2.4% (or 2.8% just comparing March '16 with March '15). The reality is that "low to mid 2's" is probably just as good a description.

*Pronounced navnee, fack, dodduh, rud er bih, though the 'd's are more like the 'th' in the English 'the'. I particularly like faic, as in "the statistics make faic-all sense".

** (Update July 14) This is too harsh. While I'm still of the view that the statistical release was inadequate, the CSO did supplement it with a separate press release (see comments below). Yesterday the CSO also announced that, while it will continue to estimate GDP/GNP according to the international rules (as it is obliged to), it is also convening a new consultative group to look at "how best to provide insight and understanding of all aspects of the Irish economy", including "whether new presentations of existing information would improve understanding". That's a good move. In that context I hope they have a look at moving on from bare bones presentation of the data.