The outlook does not look that promising.

Forecasting an economy is a mug’s game. The database on which the forecasts are founded is incomplete, out-of-date, and subject to errors, some of which will be revised after the forecasts are published. (No wonder weather-forecasting is easier.) One often has to adopt assumptions outside one’s area of expertise and even those which are not, usually involve wide margins of error. There are also theoretical as well as ideological disputes although usually the former can be pragmatically reconciled if the forecasting is done by a good team.

Professionals forecast because it is necessary operationally (e.g. the Reserve Bank’s for its monetary policy and Treasury’s for its fiscal policy) or there is a need to restrain the non-professionals who do it for publicity or to promote an ideology. Ideally one should forecast in a team (as do those two institutions). I have been involved with three such teams (I led one) as well doing less satisfactory forecasts by myself (in the distant past). Nowadays, I take a comprehensive forecast by a team and analyse it, rather than do my own.

Most commonly I use the Treasury forecast, as I did recently when I looked at the short-term state of the economy as portrayed by its 2022 Budget Economic and Fiscal Forecast. This column is about its medium-term analysis.

An economic outlook typically involves two elements. The foundation is a track of the medium- to long-term economy. Over this trend are variations reflecting the impact of shocks. Typically after a few three years the shocks fade and the forecast settles back to the medium-term track. (The separation of the two elements is not quite as independent as I am treating them, as my In Stormy Seas demonstrated, but practically that does not affect an individual forecast.)

The Treasury forecast was locked up in March 2022. I should not be surprised that events in the following three months have them a little more gloomy about the short-term – Ukraine, inflation and the world economic outlook may have a greater impact than they were thinking – and the local economy seems to be a bit soggier too. (Fortunately they give a ‘downside’ forecast which enables us to assess what they may be thinking today.) The gloomier outlook should not affect their medium-term assessment too much.

Treasury forecasts that there will be strong growth in the year to June 2023, overcoming the Covid and Ukraine shocks. Afterwards the economy flattens out with the hint of a minor recession in 2023/4. It forecast only through to June 2026 so we need to interpret their medium-term assessment carefully. Even so, they think the economy is struggling.

In the period from July 2011 to June 2019 an per capita GDP grew at an average of 1.7% p.a. In the following seven years the Treasury assessment is a growth rate of 1.0% p.a. The difference may not seem much but it means that output will be about 5 percent below the pre-2019 track.

Before I do the economic analysis, let me dismiss the political one. It is easy to say the lower growth rate is due to the economy being run by the Ardern-Robertson Government and that the Key-English Government were much better economic managers. The statement has no analytic content – it is known in the trade as whining/whingeing – and typically made by people who have not the economic competence to forecast tomorrow’s breakfast. What a professional economist wants to know is how one gets from government to management. Saying the government is spending too much is not really an explanation without details. Without one, it is an ideological statement common among the whiners/whingers and echoed by the commentariat.

A second explanation is that there has been scarring, that is, that Covid (and possibly the Ukraine invasion) have permanently damaged the economy. I am a bit sceptical of this argument. I can see how it may have accelerated some trends – such as working at home – but what else? Heavy borrowing, evident in the rising external debt to GDP ratio, has reduced incomes but GDP measures production. So New Zealanders are getting a lower share of the country’s production.

(There are other sources of ‘scarring’. We have had to devote a lot of investment to fixing up the consequences of light-handed regulation such as leaky buildings. We are devoting a lot of investment to earthquake proofing, following the Canterbury and Kaikoura investments. We are investing in cleaning up the pollution produced in the past and reducing today’s. Such investment does not add much to long-term economic (material) growth.)

A serious forecaster always checks what is going on overseas. The Treasury expects the world economy to grow strongly but reports only to December 2023. I suspect today they would ease that forecast down – as the international forecasters are doing – partly because of the Ukraine invasion, partly because central banks are raising interest rates to moderate inflation, and partly because expectations about the Chinese economy are being scaled back. There is little indication of what the Treasury thinks after 2023. I wonder if it is contemplating the affluent economies being in a phase of secular stagnation, perhaps with the Chinese one struggling compared to its performance over the last few decades. (I was going to update my thinking on secular stagnation for this column but did not have the room. Today’s column is the Treasury story.)

I observe that Treasury is pessimistic about further gains in the goods terms of trade (the relative price we get for our exports) through to 2026; gains do boost the economy. They don’t tell us why. I don’t think it is oil prices.

Another possibility is that the potential recession in 2023 is an echo from the Covid and Ukraine shocks and the economy will recover in 2026. Yeah right.

Treasury does not seem to forecast the production side of the economy – what is happening to various industry sectors. But there are hints. Residential building stagnates after 2023. Probably that means that after a boost, the industry is at full capacity. Overall unemployment is expected to increase (by about a third) which suggests that elsewhere in the economy there may be some capacity. Exports continue to increase.

In summary, the medium-term prospect of the economy – say, three years out – is not booming and it may be stagnating. I suspect the Treasury is unsure (there may be – should be – some disagreement in its forecasting team). So am I.

That leaves plenty of room for the whiners/whingers to make their political and ideological points bereft of the careful economic and statistical analysis which underpins a serious forecast.