Fiscal policy does its job

Before this Budget, just about everyone urged Grant Robertson to go for it (including me). The big initial question was always going to be: how large did the fiscal boost need to be?

Various bits of triangulation help here. In its pre-Budget economic scenario modelling, Treasury was running with an additional $20 billion (if the outlook didn't turn out too horrible) or an additional $40 billion (if it did). The most recent IMF forecasts suggested that the more downbeat scenario might be in play, so something closer to the $40 billion end sounds a plausible estimate of a minimum level of support.

Yesterday's Monetary Policy Statement from the Reserve Bank was using $30 billion as a working assumption: even fiscal support of that order would still see unemployment peak at 9% this year and GDP drop by 8.3% in the year to March 2021. The RBNZ also noted that its baseline scenario was relatively optimistic, and sketched two worse ones, so again you get $30 billion as a minimum and arguably more.

Against that background, the planned boost delivered, with $50 billion allocated to a Covid-19 Response and Recovery Fund (CRRF). I was especially pleased to see an extension of the wage subsidy scheme: supporting immediate cash flow is 90% of everything at the moment. Lending, or other assistance (eg the planned support for maintaining R&D), while worthwhile, are wholly secondary to the immediate priority of supporting income. And while I'd have been just as happy to see the existing extended without further qualification, I can see that targeting it to the most-affected saves some money and possibly helps maintain wider social support for what is the essential policy of first response.

It may be that not all this $50 billion gets spent. Elsewhere in the Treasury documentation the Budget Economic and Fiscal Update (the 'BEFU') says (B.3, p9) that "The main economic forecasts assume approximately $35 billion of discretionary COVID-19 fiscal support, alongside significant monetary policy stimulus. An additional economic forecast is also presented in which fiscal support is extended further, in line with the overall magnitude of the COVID-19 Response and Recovery Fund (CRRF)". But even $35 billion looks to be in the ballpark of what was needed - well done.

One thing that somewhat bothers me though is the degree of front loading. It's not bad, as the table below shows, with some $20.5 billion being spent under the March 17 package and the CRRF combined. And it's obviously hard to roll out many billions of operating expenditure at the drop of a hat - a lot of the programmes in the CRRF look to be works in progress, and I'm not surprised. But a large chunk of that $39.3 billion of still unallocated CRRF money needs to get spent in the 2020-21 year when it is most needed, and not in the years beyond.

As always with New Zealand (and overseas) Budgets, a lot of focus goes on those headline CRRF and fiscal deficit numbers. And yet again (as I said in 2019, 2018, 2017 ... ) the single most important indicator in the Budget material is not those headline eyecatchers.

Rather, it's the 'fiscal impulse'. That's a measure which abstracts from cyclical impacts on the headline Budget surplus or deficit, which can give a misleading impression of whether is is boosting or braking the economy. The fiscal impulse compares one year's Budget to another's, when both are stripped of cyclical effects on revenue and spending, and then asks how has the true underlying situation changed? If a (true, underlying) deficit has got larger, it's a boost. If a (true, underlying) surplus has got bigger, it's a brake. Here are this year's estimates, which (given the larger uncertainties) are even more best guesses than usual.

The fiscal impulse shows a very substantial fiscal boost of some 7% of GDP in the current fiscal year ending this June 30 - very much what was called for. But the fiscal impulse drops to only a small extra stimulus in the year to June 2021, which agrees with the time pattern shown in Table 2 above.  Next time we see these numbers, which will be in the pre-election fiscal update, I hope that more of the CRRF will have been brought forward and deployed in the critical months ahead.

What does the economic outlook look like? Just what you'd expect - a difficult year ahead, with (all going well) a strong recovery in the 2021-22 year. Again, though, you see the value of getting the full CRRF fund spent (and quickly). The main forecast (in bold) is based on spending $35 billion, and GDP drops by 1.0% in the 2020-21 year. Spending the full $50 billion turns a 1.0% decline into a small 0.6% increase. Every way you look at it, you get back to the same place - spend it all, and spend it soon,and make sure that execution of the programmes goes to plan. The other two forecasts, by the way, are 'things are worse' and 'things aren't quite so bad' flavours.

This is fiscal policy doing its job. Yes, nod to the long term (and important) objective of rebuilding the ammunition chest down the track. But put out today's fires first. And the fact that we have the ability to do it on this scale was generously acknowledged in the Budget speech today, where Grant Robertson said that "These were conscious choices that did not go unchallenged. But this strong fiscal position, built on the work of Bill English and Michael Cullen, now means we are much better placed than many other countries to use our balance sheet to cushion the blow of COVID-19 on the economy and to protect the wellbeing of New Zealanders. The rainy day has arrived, but we are well prepared". Our oppositional parliamentary system doesn't always make it easy to stick to multi-year fiscal discipline: today's Budget shows why it matters.

More support in difficult times

Highlights for me of today's Monetary Policy Statement:

• The official cash rate will likely be held at 0.25% "until early 2021" (p4). An eventual negative OCR isn't totally off the table, however: "If further stimulus is deemed necessary, additional options include ... setting a negative OCR" (p19)

• The bank aims to keep longer-term interest rates low by expanding its programme of bond buying -  the limit on its "large scale asset purchases", or LSAP,  will be nearly doubled to $60 billion. What caused what, and how much, isn't clear but net net, between the LSAP and everything else going on, longer term yields have moved significantly lower, and appropriately so, as shown below (from p18)

• The job of getting inflation to 2% or so is even harder now: "the economic impacts of the COVID-19 outbreak will reduce inflation significantly ...  Overall, CPI inflation is likely to be much lower by the end of this year, possibly below the 1 to 3 percent target range" (p8)

• It would help if the exchange rate was a good deal lower, but paradoxically we're looking relatively good by international standards, so people aren't actually that keen on selling it: "New Zealand remains in a relatively positive position given its relatively low number of COVID-19 cases, the relatively moderate declines in its export prices so far, and its strong fiscal position" (p7)

• The bank's expecting a big fiscal boost of around $30 billion on top of the $20 billion or so already committed (p8), most of which is the wage subsidy ($12 billion) and tax relief ($5.9 billion)

• The RBNZ is getting restive about lower wholesale interest rates not flowing through to retail level: "We expect to see retail interest rates decline further as lower wholesale borrowing costs are passed through to retail customers. It remains in the best long-term interests of the banking sector to promptly maximise the effectiveness of our LSAP programme (p2). Not enough has happened up to now - "So far, we have not observed the pass through of wholesale interest rate reductions to retail interest rates to the extent we might expect in normal times" (p19) - and there have been reasons for that - "This likely reflects a number of factors, including strong competition for deposits as market funding conditions deteriorated" (p19) - but we need to move on: "As the economy comes out of lockdown, we expect a lift in lending market activity and increased competition from banks to put downward pressure on lending rates" (p19). The bank has made it easier for banks to fund at (cheaper) wholesale rates than from depositors, and as a result "We expect our recent monetary policy easing to pass through more fully to bank funding costs and lending rates in the near future, and will be closely monitoring movements in retail interest rates and bank margins" (p23)

• The economic outlook is very difficult. No-one can do better in current conditions than sketch out some possible scenarios: here are the bank's (p10).You'll note that its baseline is relatively optimistic, and things could go worse. Even on the baseline view, it will be late 2021 or early 2022 before we're back to where we were pre-covid. The immediate outlook is for a 2.4% fall in GDP in the March quarter and a 21.8% fall in GDP in the June quarter, followed by a 23.8% rebound in the September quarter. The cumulative effect of those three is a 5.5% decline, which will take some time to claw back.

One thing that's occurred to me (and occurred to Bernard Hickey of Newsroom in the post-Statement media conference, too) is that I wonder why we don't do what the Reserve Bank of Australia does, and simply announce a target level for one or more long term interest rates: in the RBA's case, an 0.25% target for three-year Australian government bonds. The Bank of Japan has had a long-standing 0% target for the 10 year Japanese government bond. Adrian Orr's response was, as I understood it, to the general effect that the RBNZ didn't have enough control over the market to steer towards something precise. I dunno: at the end of the day, we're not especially interested in whether the LSAP programme is $60 billion or $40 billion or $100 billion. What we actually want is the outcome of at worst stable bond yields (despite the expected flood of new issuance) and ideally lower again. Why not cut out the focus on the middle-man process and cut to the chase of the desired outcome?

Go big

Next week we get the double header of a Monetary Policy statement (on Wednesday) and the Budget (on Thursday). Simple message for all involved: go for it, and go as big as you can.

If you haven't appreciated it already, I've had a look at how the impact of covid compares with previous setbacks. Here's the history of New Zealand's GDP growth back to 1980, and I've included for comparison the growth rates for the overall world economy and for the US. Data by the way come from the very useful (and free) World Economic Outlook database maintained by the IMF.

There's been nothing remotely like this in most people's working lifetime. While point forecasts in current circumstances are of only limited use, for what it's worth the IMF thinks that New Zealand's GDP will drop by 7.2% this year, even worse than the 5.9% they expect in the US, which has been as politically dysfunctional on covid as you'd have expected. The GFC is a tiny blip by comparison.

The good news - if you can call it that - is that the IMF is in the 'sharp V-shaped recovery' camp. But if I were Adrian Orr or Grant Robertson, I don't think I'd bet the economy on that assumption. At the Bank, I wouldn't be bothered about walking back from March's statement that "The Official Cash Rate (OCR) is 0.25 percent, reduced from 1.0 percent, and will remain at this level for at least the next 12 months". That was then: this is now. And at the Treasury, they recently showed us some scenarios based on $20 billion and $40 billion fiscal support programmes. The $20 billion programme was based on GDP dropping this year by 4.5%: the $40 billion responded to GDP potentially dropping 8% this year. If the IMF is indeed right, we need to be down the $40 billion end.

Not good enough

We're about to have the most important Budget in a generation. There's no question that Grant Robertson has inherited one of the most difficult challenges - probably the greatest - in living memory. What he does, or doesn't do, will define how, at a minimum, we cope in the near-term with covid, and, in all probability, will have longer-term repercussions on how our economy behaves and evolves. I wish him well. I doubt if there's anyone, from any end of the political spectra, who'd disagree.

So there's obviously an enormous public interest in what he's going to do on Budget day, May 14.

Normally, the people most interested in fiscal policy sign up for the 'lock up' - a vetted group of people, mostly the media but also the likes of bank economists and sectoral lobbyists - who on Budget day get access (usually mid-morning) to the Budget documents ahead of their release, subject to a time embargo. The deal is, if you've got a strong interest in fiscal policy, and Treasury agrees you're a player in that space, you get to see the stuff in a controlled environment, and with the advantage of the preparation time, you will be able to provide informed commentary, but (because of the agreed embargo) not before the Minister of Finance does his thing in the House. Works for everyone. I've been in lots of them.

But not this year. I won't be there: neither will the bank economists, the trade unions, the farming organisations, the investment managers. Here's what's happened.

Earlier this week I asked Treasury what this year's arrangements were going to be, given that the usual physical gathering in the Beehive was obviously out of the question.

Back came the answer that "the Minister and the Speaker of the House have arranged for a Restricted Budget Briefing to be held at Parliament for accredited members of the Parliamentary Press Gallery only".

I pushed back. I mentioned, for example, that the Fed has managed highly market sensitive press conferences over video conference, as you can see for yourself here. In response to the suggestion that video conferences are supposedly not secure enough for Budget-sensitive information, I mentioned things like Zoom's 'waiting room' and password protected access, and the fact that Cabinet apparently has met over video with no issues. And I also said that Treasury has been able to rely for many years on an honour system where lock-up attendees, in good Kiwi fashion, can be trusted to do the right thing. And don't give me grief over the (one, isolated) abuse of the honour system at the equivalent RBNZ lockups. We're generally a high-trust society, and I like that, and I'd like to see it continue.

Got me nowhere. Everyone involved was very nice about it, but where we've apparently ended is that the most important Budget in our lifetime is going to get immediate scrutiny only from a very small group of political insiders. New Zealand deserves better: we don't need this highly important event filtered through this small-mesh sieve.

This is not right. I'm perfectly happy to accept that I've got an interest here: being able to make an on-the-spot quick assessment of the Budget is a plus for me, as it is for everyone else in the usual lock-up. But my wider point stands: civil society is better served by wider access, not less.

Along the way I also made the point that these days, it's easy enough to acknowledge that a decision can be revisited, or as I put it to them, "there's only upside in saying 'we thought we had to tightly corral it, but now that we've thought about it, we can do this'". That fell flat, too.

Of all the Budgets in all the world, this is the one that should be most open to immediate analysis. The powers that be can, and should, rethink.

Where are we?

Perforce, a wide variety of public and private sector organisations have stepped into the breach and done a good job of filling in the long-standing gaps in our ability to track the economy in close to real time. I've probably said enough about the need for Stats NZ, in particular, to keep up the effort when we get back to normal, so instead let's have a look at what the indicators are actually telling us.

On the upside, Sense Partner's update today showed that electricity generation is on the rise. There has to be a pretty good link between generation and overall economic activity: the data (originally from the Electricity Authority's useful database) suggest that the economy was running some 20% below normal levels: since dropping back to Level 3, we look to be operating some 10% below where we were. Better, but still a large shock to production and incomes.

The TradeMe jobs listing and job ad views also suggest some decent improvement from the very worst, though both are still well down on normal. Other indicators - particularly those for transport volumes - are however still at dire levels. Sense has started reporting usage of the Apple Maps app, which indicates mobility (Apple has the data on a variety of countries here): there was a bit of a blip immediately around the time we announced Level 3, but it's dropped back since to a small fraction of previous levels. An arm of Stats, Data Ventures, also has a good range of mobility data here. They show a similar collapse, concentrated on retail, employment and tourism mobility.

Treasury's latest dashboard has especially useful data on retail sales. It's dreadful: eyeballing it, it looks like consumer spending is roughly half of its pre-covid levels, even after some improvement from the depths of Level 4.

The data suggests that the setback to New Zealand retail sales is a good deal more severe than the one in Australia. This is from the AlphaBeta / illion dashboard I mentioned the other day. But that should be no great surprise, as our lockdown has been stricter than theirs.

Incidentally, there's been a bit of sniping here in New Zealand about firms that supposedly shouldn't have applied for the Jobseeker Support scheme. By way of perspective, the Aussie Bureau of Statistics, as part of its covid-19 coverage, has discovered that overall some 61% of Aussie businesses have registered or intend to register for their equivalent JobKeeper Payment scheme. Here's their graphic (from this report) of what percentage of each industry has registered, with the boxes proportionate to industry shares of total employment. The industry pattern is exactly what you'd expect. Domestic critics should pull their heads in: everything we see (and bear in mind we have it worse than them) is overwhelmingly showing real difficulty for businesses in both countries, not bludging.

The severity of our setback raises the question about whether we're doing enough to push back with expansionary policy. Here's a chart from the Treasury dashboard that looks at some comparators.

It's early days, but I suspect that our fiscal response is going to have to be a good deal larger again than it has been to date. The Jobseeker Support scheme was an excellent start - especially the quick non-bureaucratic process - but I strongly doubt that 7% of GDP in fiscal support is going to be the final bill for effective economic pushback.

Even more real-time data

An economist colleague - oh all right, Kieran Murray of Sapere - sent me through some fascinating near-real-time economic data in Australia. It's from a partnership between illion, previously the Australian operations of Dun & Bradstreet, and Aussie economic consultants AlphaBeta.

Their very up to date data covers, among other things, consumer spending by region and by category, as well as indicators of personal or business financial distress. Here for example is the overall consumer spending graph. The distinction between the 'crisis' and 'stimulus' periods mainly reflects the impact of the A$750 cheques that went out from the end of March to over six million lower-income Australian households.

The sectoral breakdown of spend shows exactly how we've managed through lockdown: the biggest increases were on food delivery, online gambling, furniture and office (it's become evident from Zoom meetings that many folks, to start with, didn't have anything like a half-way equipped home office), home improvement (ditto), and alcohol and tobacco. While the bets and the booze don't reflect very well on how we've spent our enforced time at home, there's a small solace that the next largest increase was on pet care. Subscription TV was up too, though not as much as I'd have expected (11% more than in a 'normal' week).

This is excellent stuff. Yet again we've shown, if we put our minds to it, that we can actually get a much better handle on the real-time state of the economy than we've had before: if the Australian Treasury or others with skin in the game didn't know the likely scale and shape of the covid hit to retail sales, they do now.

Next thing is to keep this going on the other side of covid. As I've been banging on for a while (eg here and here), over the years we've had inadequate indicators of the cyclical state of the New Zealand economy: they've been too few and they've been too late. As we're now discovering in both New Zealand and Australia, there are treasure troves of near real-time data all over the place that can be used to fill in the gaps. Hopefully operators like illion and AlphaBeta will keep these data flows going but if not, and in any event, Stats NZ and their counterparts ought to be getting alongside these data providers and developing a suite of timely high-frequency indicators. Covid's been no time to be blundering in a statistical fog, but neither is anytime else.

Getting even more real

No sooner had I posted about some promising 'dashboards' from Sense Partners and the Treasury, which aim to use a variety of data to try and gauge exactly where economic activity has got to through lockdown, than Stats also came to the party with its own data portal (media release here, portal itself here).

It's excellent. They've even found a data sources I'd never heard of, and I've played around with quite a few. It's from the GDELT Project, showing weekly economic sentiment (it's in the 'Economic'/'Confidence' section). I'm not sure whether it's New Zealand specific or global, but either way it's informative.

Here's Z's weekly fuel sales (in 'Economic'/'Activity'): hat-tip to them for sharing.

Gift horses and mouths and so on, but if the portal could organise some weekly (or even daily) electronic card expenditure data, that would be a useful extension to what is already a good (and easy to use) data set.

Stats says all the right things about the data being other peoples', not theirs, and go look up the methodology of the original creators if you want to find out more about what they mean and how they've been created.

All good stuff - and let's hope that on the other side of covid, Stats give some thought (and Treasury gives some money) to a permanent improvement in our ability to keep our finger on the day to day pulse of the economy.

Getting real

We don't have an adequate grasp on the real-time state of the economy. We need much more close-to-real-time data.

That's it. The rest of this post is a riff on the same theme.

As covid wreaks its damage, it would be good to know, now, what that damage is: what's the initial hit to GDP? Where are the worst impacts? How are the knock-on ripple effects going? Among many other things, it would inform how hard fiscal policy needs to fight back. As it is, we - and many other countries - are at the "Oops, did I say $10 billion? I meant $40 billion" stage of Finance Ministers' groping for what the fiscal response needs to be.

Crises apart, we should always have had better high frequency cyclical data than we've actually had. As Michael Reddell said recently in the 'Measuring the slump' post on his Croaking Cassandra blog, "We and Australia are the only two OECD countries without a monthly CPI, our GDP estimates (quarterly only, as with most countries) come out only with a very long lag, we don’t have a monthly industrial production series, and we still don’t have an income-based measure of GDP". These deficiencies have been known for a long time - I can remember discussions over the years at Stats' Advisory Committee on Economic Statistics (since disbanded) - but the debate never got as far as prising open Treasury's chequebook.

Michael had several constructive ideas on how to improve things, including having Stats publish the monthly results from its rolling quarterly Household Labour Force survey, and having Stats also "look at hosting some sort of dashboard pulling together, and making openly available, all manner of formal and informal economic indicators. There have to be lots".

The good news is that at least two parties (though not Stats, yet) have had a go at dashboards.

First out of the blocks was Sense Partners: you can access their latest six-variable dashboard here. It's good, isn't it? I especially liked the electricity generation graph (below). You'd think that it must be reasonably close to the fall in GDP, and is suggesting something like a drop of close to 20% in output since late March (though there may be seasonal stuff going on, too).

They were closely followed by Treasury, who've just put out theirs (media release here, access to the pdf dashboard here). Personally I felt the Sense set gave me more of a real-time feel, though Treasury's information was interesting in its own right, especially the traffic data and the data on uptake of the job subsidy scheme (below).

The next thing that would be really useful would be some composite indicator of all these glimpses of the overall underlying reality. As it happens economists have a nifty way of devising one: it's called 'principal components', and works by assembling a lot of data, hopefully all related (positively or negatively) to some underlying common influence, and then analysing it econometrically to see if you can identify a common background factor.

Treasury's dashboard helpfully included some international data, and one of the series shown was, indeed, one of those composite indicators, for the US. It looks like this.

If you want to follow the series yourself it's here at the Fed of New York site, and there is a (short) write-up of how it all works here. The devisers of the index have calibrated it so that percentage changes in the index can be (give or take) read as percentage changes in GDP, or as they put it, "a reading of 2 percent in a given week means that if the week’s conditions persisted for an entire quarter, we would expect, on average, 2 percent [GDP] growth relative to a year previous". So we know that if early-April conditions persisted for the whole of the June quarter, US GDP would be some 9% lower.

Can we be sure that the weekly economic index does in fact track US GDP pretty well? Yes, we can, as you can see below (this is from Chapter 1, 'US economic activity during the early weeks of the SARS-Cov-2 outbreak', in Issue 6 of the Centre for Economic Policy Research's covid economics series, well worth following).

Two things to finish with.

One, obvs, wouldn't it be nice if someone did the same number crunching on New Zealand data and gave us close to a real-time reading on where GDP has got to? And yes, I'm happy to be part of the effort if anyone feels the urge to get it done.

Two, the wider point about the limited range of our current official cyclical data, and the speed with which what we have gets published, needs to be addressed. You can't go to a competition or regulation conference these days without people blathering on about how 'big data' enables market power, or threatens privacy, but you don't see anything like the same focus on how the torrents of big data could be used to generate near-real-time cyclical gauges.

It's fine to have the business as usual, industrial strength, quality-assured things like the quarterly national accounts. But as Grant Robertson and the lads at Treasury - and the rest of us - are finding out, there's a big role for the cheap and cheerful but timely and informative indicators, too. We've shelled out some $9 billion on wage support: in the greater scheme of things a couple of mill to zero in on where we actually are would be money very, very well spent.