Matt Nolan

New Zealand March 08 GDP

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So the economy shrank 0.3% over the March quarter (or 0.6% if you buy the expenditure measure instead) – the appropriate tables are here (*).

This was bang on expectations. The stock boost we talked about was there, but everything else was sufficiently bad that it landed on expectations anyway 🙂

What concerned me was the GDP deflator (the fourth table) – 5.8% annual growth, highest since June 2001, when our dollar had tanked and inflation was sitting happily outside the target band. The aggregate supply story that I’ve shown my affection for is still running wild (*) (*) – temporary reversals in growth over the coming quarters and rising inflation.

Consumer confidence is in the toilet (*) (*) but this is because of significant price increases in food and fuel – cutting interest rates now will simply lead to bigger increases by reducing the value of the New Zealand dollar. Once lower interest rates do feed into consumer demand (once effective mortgage rates start to fall and exporters are able to change their fixed rate contracts), the drought will be well over, and economic activity will “attempt” to shoot upwards, capacity pressures will reappear, and inflation will be out of the bag. Ohhh well.

Update:  Other New Zealand blogs talk about the figure: The Standard, The Hive.

Matt Nolan

Should we thank god for our farmers?

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In an interesting move, Federated Farmers president Charlie Pedersen stated that we should “thank god for the (food) producers” (*) in New Zealand, for providing us with food and/or wealth.  Now I have to admit, I find this attitude a bit ridiculous.

Don’t get me wrong, agricultural products do create a lot of wealth, hell meat and dairy alone accounted for 29% of our exports over the year to April (Source).  However, doesn’t the farmer and the other people involved in the production process extract the surplus from this trade?

They produce these goods out of their own interest – this is the beauty of free exchange.  However, I don’t start praising to the high heavens about people I buy things off.

The idea that farmers are creating wealth for us stems from the “multiplier“, whereby a small increase in a countries wealth turns into a greater return over time, helping everyone.

However, the multiplier idea is borne from the concept that demand creates its own supply – hardly a realistic assertion in economics, which is supposed to be the study of scarce resources.

Also remember that if the land and resources were not used for farming, they could be used for something else – as a result of this opportunity cost from farm production, the reduction in wealth will not be as severe as some may suggest if the farmers decided to stop producing in the face of our “lack of appreciation”.

Ultimately I feel like Mr Pedersen is saying, “farmers own a large number of the resources, and so we should thank god that they use them well” – when I frame it this way the claim seems ridiculous!

Matt Nolan

Are New Zealand’s inflationary pressures contained: The nominal wage evidence

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Greg Mankiw has an interesting post on what would make a good inflation target (ht CPW). According to work by Ricardo Reis and himself, aiming at the nominal wage is a good way of ensuring the highest degree of price stability – according to models calibrated to recent US data (paper here *).

Using this conclusion he shows a graph of private hourly compensation growth and states that inflationary pressures in the US are not as much of a threat as some analysts are positing.

If the same implication held in New Zealand (which there is no assurance of), how would we be looking:

Source, QES wage data Statistics New Zealand (*)

Not so good it seems 😛

Matt Nolan

Biofuel regulation and price

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The New Zealand governments biofuel regulation has just come back from select committee. The Hive makes the excellent point that some of the changes to the bill may breach WTO rules. However, my focus here will be on the biofuel regulations impact on prices.

There has been a lot of talk about how mandatory biofuel sales will impact on prices, ranging from a 6c/lt increase to a 4c/lt decrease in prices (*).

Now the first thing to ask when looking at the biofuel regulation and prices is, how will it impact on the fuel companies “marginal cost”. The fuel company will set the price such that it makes the highest profit it can – as a result they will want to set marginal cost (the cost of selling one more unit) equal to the marginal revenue they receive (the return from selling one more). As marginal revenue is falling as we decrease the price there will be some point where they are equal – so the question remains, how could this impact on marginal cost?

I think the answer is that it doesn’t, the marginal cost of selling a litre of petrol will still be the same. Sure having to install a bunch of new infrastructure may be expensive, but this is an increase in fixed costs – the firm will have no incentive to pass this on to consumers, as it should be setting prices at a level that maximises profit.

However, this answer ignores a bunch of extremely important points. Read more

Matt Nolan

GDP preview March 2008

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March quarter GDP numbers are out on Friday. Westpac has a good preview of the upcoming GDP numbers here. They, the Bank, and the market are picking a 0.3% fall in quarterly GDP over the March quarter.

Remember, GDP=C+I+G+X-M (consumption + investment + government spending + exports – imports). We “know” that growth(X-M)<0 and growth(C)<0. With benefit spending falling and limited policy initiatives over the March quarter growth(G)=small if not negative. Also with residential and non-residential wpip coming in negative it appears that growth(I)<0. This is enough to give us a pretty negative result.

However, Investment may surprise if stock levels have risen significantly. For example, the Tui oilfields produced a bunch of oil of March, but the timing of Easter made it difficult for them to ship the stuff out – knocking down exports (X) but potentially leading to growth in stocks.

Update:  For some reason I forgot to mention the downside.  Given how weak partial indicators have been, a fall of 0.6% could be on the cards – however, a bigger fall than that would concern markets.  Note that we had a 1% lift in December, so a 1% fall would put us back to where we were in September (in seasonally adjusted terms).

What do you guys think – will we see a negative quarter, will we see another one over June?

Matt Nolan

In defense of Ricardian equivalence – sort of

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On his blog, Dr Mankiw titled a post “so much for Ricardian equivalence” after noticing that US retail recovered following the government rebates. This off the cuff statement comes from the fact that the government rebate also had no reduction in the long-term level of spending, and so “in theory” consumers will have saved all the tax rebate, realising that they will have to pay this tax later anyway.

The excellent division of labour blog then takes this claim to task stating that the income tax rebate mainly went to low-middle class families, causing a common pool problem with the income tax – as the rebate is temporary, but it is not clear what form the future funding of government spending would take (although I’m not sure if this is actually a common pool problem, it just seems to be to do with giving a progressive rebate and then placing the future spending burden evenly across society, effectively increasing the net tax income of the poor who are liquidity constrained – as long as the amount the poor spends does not impact on the future need for tax income).

However, I don’t see why either side has to be wrong. Read more