The takeaways from the just released data are:
1. Any estimate of GDP is subject to error.
2. The 0.2 percent decrease in the March 2022 quarter is not precise and will be revised, with the mild likelihood that it will eventually be higher.
3. New Zealand has no ‘official' definition of a recession.
4. The New Zealand economy seems to be stagnating. Whether we are in a recession (or going into one) or it is something more structural we cannot yet tell.
Statistics New Zealand recently published its preliminary estimate of GDP for the March 2022 quarter. The headlines were that it showed a 0.2 percent fall from the previous (December 2021) quarter. There was a rush to say that New Zealand was in ‘recession’. Then everyone moved on, leaving the recession interpretation lurking. Few even noticed the data refers to the March 2022 quarter; because the middle of the quarter is February 2022, it was describing events, in effect, four months ago.
Instant commentary works well for headlines, but sober analysis does not leap to conclusions. However, sober analysis is very boring. Sorry that this column is going to have to be too. But you do deserve a more thoughtful response, even if it is boring. Here is some analysis.
Any estimate of GDP is subject to error.
We are not sure how big the error is. (It may be at least 0.2 percent for a quarterly figure.) A major source of the error is the sheer difficulties of getting the quality underlying data. Unfortunately, the smaller the economy, the less likely such collection errors are to average out. (Another source of noise is that the figures are seasonally adjusted in order to enable comparisons which are less influenced by the regular seasonal variations over the year. The exercise is more complicated that Stats101. I wasted much time in my youth studying the issue – even published a paper in Econometrica on it. For instance, sometimes Easter is in the March quarter, sometimes it is in the June quarter. Sigh.)
The estimate is a preliminary one and subject to revision.
Were SNZ to wait for all the base data to come in before publishing, we would be waiting a long time. The latest report says that it was still gathering material for as far back as December 2020 (perhaps even further) and that quarter’s figure has been revised. If you are concerned about the delays, why not complain to the Minister of Statistics that his department is underfunded (copy to the Minister of Finance)?
The revisions are quite marked. Analysing the last six SNZ releases gives an average absolute revision (that is, ignoring the sign/direction of the revision) on the previous release’s estimate of 0.4 percentage points. Sometimes they go up, sometimes they go down. Allowing for sign, the revisions have averaged an increase of 0.05 percent. Over the longer period they can cumulate. The December 2020 figure just released is 2.0 percent higher than the first estimate released in March 2021.
Even if you found the previous paragraph tricky, you should have got the idea that the 0.2 percent decrease identified in the last press release is not precise and will be revised, with the mild likelihood that it will eventually be higher.
New Zealand has no ‘official’ definition of a recession.
The commentariat says there is an official definition of ‘recession’. There is not even a widely agreed informal definition. If you ask the relevant agencies – Reserve Bank, Statistics, Treasury – they will say (politely) that there is not one.
The commentariat often claims that a GDP falling for two successive quarters defines a ‘recession’ (‘officially’). The definition comes from the United States following a massive research program; there has been no similar such study here. The research was not based simply on GDP but on a multitude of economic indicators including business and consumer confidence, the state of the labour and housing markets and business investment.
Every country is different, not only because of differences in the quality of their data, but because their economy is different. You don’t think that Chinese economists, whose economy was until recently chugging along at a 10 percent increase a year, wait for two quarters of negative growth before they hit the ‘concern’ button? A mere 5 percent annual growth rate worries them (and Mr Xi even more).
The tendency for the commentariat to adopt American thinking uncritically is one of the persistent dangers we face. It is so pervasive, one is surprised that sports commentators do not interpret rugby in terms of gridiron. That may be indicative of why we are good at rugby.
So What is Happening?
The short answer is that if you are certain about what is happening to the New Zealand economy then you have not been following; the surer you are, the more certain we can be that you are wrong. (This is particularly true when there is a major disturbance like Covid.)
My tentative guess is this. Since recovering for the primary impact of Covid, the economy has been growing either very slowly or it has been stagnating. There are not a lot of industrial sectors that are growing strongly while there are number which seem to be in decline or stagnating. I’ve tabulated my best guesses:
Growing
Agriculture, forestry, and fishing
Electricity, gas, water, and waste services
Healthcare and social assistance
Professional, scientific, technical, admin, and support
Public administration and safety
Rental, hiring, and real estate services
Transport, postal, and warehousing
Wholesale trade
Stagnating to Mildly Falling
Information media and telecommunications
Financial and insurance services
Falling
Arts, recreation, and other services
Construction
Education and training
Manufacturing
Mining
Retail trade and accommodation
I also looked at the estimates of GDP measured on the expenditure side of the economy. They show a smaller fall in the March 2020. There are strong increases over recent quarters in general government expenditure, and gross capital formation. (Also for imports of goods and services, which means we are sourcing more spending domestically, thereby boosting output.) However, private consumption expenditure – the biggest expenditure item – is declining and exporting is doing even worse. (It cant be just tourism is low; it was already depressed by Covid.)
Make what you want of the list. (Other’s lists are slightly different). Ask the commentariat for anecdotes. I can see stories but I am uneasy about drawing analytic conclusions, with one exception. The overall the data suggests that the New Zealand economy has had some recovery since the Covid impact, but it is sluggish – near stagnating. Many of the more up-to-date indicators of its state suggest it is losing steam.
Whether we are in a recession (or going into one) or it is something more structural we cannot yet tell.
A boring conclusion really, hardly the headline stuff the commentariat feed on.