Still booming? Construction will be a part of this week's GDP data mix. Photo / NZME
Measuring the country’s economic output is a big deal. In theory, it’s supposed to tell us whether the country is getting richer or poorer.
So the GDP (or Gross Domestic Product) data for the fourth quarter of 2022, due out on Thursday, will be taken very seriously by economists.
Generally, if GDP statistics show growth we celebrate. If they go backwards we worry. If they go backwards for two quarters in a row we call it a recession and panic.
“We could already be in recession,” says ANZ chief economist Sharon Zollner.
“But does that mean that we’re in a recession as the person on the street would think of a recession? No, because for a person on the street, a recession is when you are at risk of losing your job.”
Economists expect GDP data due on Thursday to show the economy contracted in the fourth quarter of 2022, and have almost universally described the slump as “payback” for the big bounce in the third quarter.
ANZ has, for the record, forecast a -0.3 per cent contraction for the quarter, as does KiwiBank.
ASB is forecasting a 0.5 per cent slump, which it says will have “an element of payback” to it following the “whopper” 2 per cent lift in the third quarter.
BNZ and Westpac see a 0.2 per cent contraction.
All of them see it as highly volatile and difficult to gauge.
In the current economic cycle, with the focus on slowing economic demand to beat inflation, that’s all been turned upside down.
If GDP growth comes in as stronger than forecast, markets might read that as bad news.
But even putting aside the weirdness of hoping for lower growth, there’s a case to be made that we put too much weight on GDP as a scorecard for economic progress.
The data comes with some big structural flaws, as well as some specific reasons why it’s even less valuable than usual in this post-pandemic recovery.
GDP data still matters, but with some big caveats, says NZIER principal economist Christina Leung.
“As with all data we wouldn’t take it in isolation, we take it along with a suite of indicators,” she says.
Over the Covid era, GDP has been very volatile due to enforced lockdowns and post-lockdown bouncebacks.
“There’ve been difficulties in measurements as well and you can see that in the revisions that come after,” Leung says.
“We need to recognise that there is a high likelihood that it will be revised.”
Not only do we only find out how the economy performed some two months after the quarter has finished, but the numbers are also often inaccurate in the first instance.
That means we could at some point see data that has everyone panicking that we’ve fallen into recession - or celebrating we’ve skipped one - only to have that proved false when data is revised months later.
Zollner agrees, warning that while the initial GDP data release grabs all the headlines, the eventual revisions are often largely ignored.
“We see it in US non-farm payrolls [job data],” she says. “It’s the biggest market-moving piece of data over there. Everyone reacts to the headline, then it gets halved or doubled or whatever in the next revision and no one pays any attention.”
Both Leung and Zollner acknowledge that GDP is also inadequate as a measure of social progress.
For example, as a measure, it doesn’t count work done in the home or on a voluntary basis.
But even if we take GDP at face value as a measure of progress, it is an aggregate measure.
“It’s just a measure of activity, regardless of how good that activity is,” says Zollner. “And of course, what’s good activity depends on how much it benefits different groups in society.”
It also doesn’t take any account of the environment.
“That gap is becoming increasingly hard to justify and there’s a movement globally to say that using up natural capital, in other words destroying the planet, should be subtracted from the measure.”
But beyond the structural flaws, Zollner makes the point that GDP is in a particularly problematic space for economists right now.
GDP can’t offer any measure of the extent to which activity or spending has been brought forward through time.
In other words, it doesn’t take into account that economic strength might be artificially created either through the kind of stimulus we saw through Covid - or spending that is done to repair damage after disasters like Cyclone Gabrielle.
We’ve been through a very volatile period.
“It’s real. People have experienced that volatility so it’s not wrong.”
When you forecast it is important to have an accurate assessment of the starting point, she says.
But as a guide the volatility does make it less useful, she says.
Right now, with inflation being the big problem, the issue with GDP is the extent to which growth is outpacing potential growth, or capacity, in the economy.
“The potential growth is unobservable, the capacity of the economy has to be estimated,” Leung says.
Economists talk about the output gap.
If demand is growing at a much faster pace than the productive capacity of the economy that is when you get upward pressure on inflation, Leung says.
“That’s where it matters for inflation and in turn interest rates.”
Zollner doesn’t believe this week’s data can offer much help in these estimates.
“I just don’t think it’s going to be a good guide to the spare capacity in the economy, which is ultimately what the [RBNZ] is trying to gauge,” Zollner says.
But for all its flaws, GDP is still useful, says Leung.
“The merits are that it’s robust, simple and relatively straightforward to understand,” she says.
“There is a consistent framework for it which makes it easy to compare it across countries and time periods.
“It would be difficult for any measure to incorporate all the information we’d consider useful to get a gauge of what’s going on in the economy,” she says.
“As long we’re quite clear on what GDP measures and what it doesn’t then it is still useful to get a gauge of how the NZ economy is tracking. It’s one piece of the puzzle.”
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