Coordinating in the dark

While laid up at home with a very belated case of Covid - we're okay, thanks for asking - I thought I'd use the downtime to read the IMF's latest report on New Zealand. I'm tempted to add the traditional "so you don't have to". While you don't expect an airport novel, even economists' eyes will glaze over when they find pieties like "The OCR [official cash rate] path should be calibrated to developments in the economy, including external shocks and fiscal and other policy responses". Well, duh.

Cheap shots aside, you can't argue with the big macro conclusion - we've overheated, and fiscal and monetary policy need to brake the economy: "With exemplary management of the pandemic, New Zealand recovered faster than most other advanced economies. This supported activity and, together with generous fiscal and monetary support, resulted in strong investment and consumption. But this came at the cost of overheating against capacity constraints exacerbated by restrictions on labor movement due to border closures, and disruptions in global supply chains". 

You could argue that the RBNZ has done its bit, but that Treasury hasn't. As the graph below shows, we have a largeish positive (i.e. stimulatory) fiscal impulse in the current 2023-24 fiscal year, when if everything was nicely coordinated fiscal policy would also be tightening. Given the Auckland floods and Gabrielle I'm happy enough to cut some (but only some) slack in the circumstances and trust (hope?) that the fiscal largesse will unwind in coming years. It's also true, as Oscar Parkyn, New Zealand's alternate director at the IMF, points out in an accompanying statement, that "While the fiscal impulse is estimated to be positive in the current fiscal year, the authorities [i.e. the New Zealand government] note that near-term fiscal impulse forecasts are highly uncertain", and maybe there won't have been an unhelpful 1.8% of GDP boost to an already overstretched economy when the final beans are counted. All that said, some of the discretionary measures in the 2023 Budget, or other programmes that could have been put on the back burner, really ought to have been deferred till a more cyclically opportune time

The Executive Board assessment in the report - "Directors underscored the importance of careful calibration of the fiscal and monetary policy mix to rebalance the economy and help address long-term structural needs" - is surely right. And I'm not convinced we have a good institutional mechanism to make that happen and to expose the consequences of fiscal and monetary policy not pulling together. If Joe and Joan Public had been told that you can have your Budget goodies, but your mortgage is now going to 6% rather than 5%, how impressed would they have been?

Elsewhere in the report, the Executive Board said that "Compiling a monthly inflation index would enhance the effectiveness of monetary policy", and it crops up in various places: in the staff report (para 19), "During the consultation, the RBNZ flagged the need to improve data and real-time information to aid monetary policy decisions and highlighted the lack of monthly consumer price data as an important gap. The lack of a monthly CPI series makes New Zealand an outlier among advanced economies and is holding back a timelier formulation and assessment of monetary policy. A review of the financial resources of the RBNZ is ongoing" and (para 20, in the government's response), "Stats NZ is examining the possibility of publishing more price data on a monthly basis to enable more timely monitoring of inflation developments but noted that a monthly CPI series would require additional resources".

Sadly, we have form here. When Covid hit, we discovered we didn't have timely enough data on how the economy was tracking, and we started on a mad scramble in the middle of a crisis to develop some ('Getting real', 'Getting even more real'). Two years later along comes the worse outbreak of inflation in 30 years, and do we have the statistics to help us best cope with the latest challenge? No we don't. In our current and deeply strange ordering of statistical priorities, the Stats database can tell us what we spend monthly on imports of 'Preparations of vegetables, fruit, nuts or other parts of plants' from Bulgaria*, but it can't tell us our own country's monthly inflation rate.

Just over a year ago the Aussie Bureau of Statistics got with the plot and started its 'Monthly CPI indicator'. We saw its value yesterday when the latest number (4.9% for July) came in below the expected 5.2% - useful new info all round, with reactions across numerous markets. Here? We're still twiddling our thumbs.

*$46,015 in May