Rodney’s Ravings: God was having an off moment when he decided we needed economic forecasters

Post by Rodney Dickens

Once a quarter, the New Zealand Institute of Economic Research (NZIER) surveys eight economic forecasters for its Consensus Forecasts, the most recent version of which came out in mid-June. 

The forecasters surveyed include representatives from our main banks, the Reserve Bank, Treasury, and NZIER itself—all sharing their view on what’s in store for the economy.

And what these forecasters have predicted recently will give you little faith in their forecasting ability. Looking at the latest report, there’s a good case for suggesting that economic growth will continue to be considerably worse than any of the eight forecasters predict, to the extent the Reserve Bank should already have started to cut the OCR.

But if we go back slightly… When NZIER conducted its December 2023 survey, the most pessimistic predicted annual GDP growth of 0.8% for the year ending March 2024—just four months away. That’s the orange line in the first chart below. On average, the eight forecasters predicted 1.2% growth (the blue line) with the most optimistic predicting 1.7% growth (the pink line). None predicted the threat of a recession.

In reality, as recently reported by Statistics NZ, growth slowed to 0.2% for FY2023/24, well below what even the most pessimistic forecaster had predicted only four months out from the end of the year.

Not one of the eight forecasters saw this coming, despite there being plenty of reason to suspect that economic growth would continue to deteriorate after its brief, post-election improvement—as a natural consequence of the tail-end of interest rate increases last year, the significant slowing of population growth due to a large fall in net migration, some upside in petrol prices, and the deterioration in the housing market that is now dragging down house prices.

They also failed to predict the two recent mild recessions—falls in Gross Domestic Product (GDP) in at least two consecutive quarters. The chart below depicts quarterly GDP growth in New Zealand over the last 10 years, with the two minor recessions highlighted.

And there’s good reason to expect economic growth to remain weaker than any are currently predicting.

In the June 2024 survey, the eight forecasters estimated (on average) that the economy had grown by 0.1% in the June quarter (just ended)—and that we’d see 0.2% growth for the current September quarter. The most pessimistic estimated that GDP fell 0.2% last quarter and will do the same again this quarter.

While not always on the mark, our most useful leading indicator of annual GDP growth, the BNZ / Business NZ survey, initially signalled a minor improvement in GDP in the March quarter—but is now estimating a sizeable fall (shown in the third chart, below).

And supporting the fact that GDP is in the process of falling more than even the most pessimistic of the eight forecasters predicted, is the drop in monthly electronic card spending shown in the fourth chart.

A massive fall in job ads already signals the unemployment rate will increase more than the Reserve Bank needs to tame wage inflation, and surveys of price inflation expectations suggest price inflation is largely under control already. This means another recession is not needed to tame inflation and will be overkill. Some of the bank economists are starting to wake up to this, like the BNZ economists.

Unfortunately, the Reserve Bank will remain behind the game for a while longer and will inflict more economic pain than needed to tame inflation.

By Rodney Dickens, Managing Director, Strategic Risk Analysis Ltd www.sra.co.nz.

The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Squirrel shall not be liable or responsible for any information, omissions, or errors present. Any commentary provided are the personal views of the author and are not necessarily representative of the views and opinions of Squirrel. We recommend seeking professional investment and/or mortgage advice before taking any action.

To view our disclosure statements and other legal information, please visit our Legal Agreements page here.