Wednesday, 21 December 2016

How strong is strong?

The economy's ticking along nicely. Tomorrow's GDP numbers for the September quarter are expected to show an 0.8% increase for the quarter, which would make it 3.6% for the year. And virtually all the recent data have been solid to robust. On the solid side, for example, there's the December quarter Westpac McDermott Miller consumer confidence index ("New Zealand households are in the mood to celebrate. However, it looks like the party will be more of a relaxing family barbeque, rather than a fullblown rager") while down the robust end we've had the latest (November) BusinessNZ/BNZ Performance of Services Index ("a picture of strength"). In per capita terms, it's not the boomer it might look like at first sight, and I'll come to that, but it's still a pretty picture.

Unsurprisingly, forecasters have been upping their estimates of what's down the track. The latest (December) quarterly consensus forecasts collated by the NZ Institute of Economic Research showed that likely GDP growth in the year to next March is now reckoned to be 3.5% (the September quarter consensus had picked 3.2%) and there has been a marked revision upwards for likely employment growth, which is now expected to be a stonking 4.8% compared with the 3.2% that seemed the best guess back in September. Forecasts for growth and employment over the three years to March '20 have been nudged a bit higher, and there isn't a single forecaster (out of the 9 polled) prepared to call a recession over that period.

But you knew that. What's my point? It's this: I reckon the short-term outlook may be even stronger than people currently expect.

Recently I've been playing around with my little Excel forecasting model, and I can't easily get the GDP growth numbers for the next year much below 4%. I've assumed there will be some kind of wealth effect on consumer spending, and I've assumed that there is enough capacity in the building trades to allow for another reasonably substantial rise in housebuilding. If that's your view of the world, numbers north of 4% start shimmering into view. Interestingly, according to the ANZ confidence surveys (for example, here), "Our confidence composite gauge (which combines business and consumer sentiment) is pointing to GDP growth accelerating to north of 4%. Capacity constraints (getting skilled labour) will put a dampener on that but we like the spirit".

I could easily be wrong. Perhaps New Zealand households have suddenly had an outbreak of financial prudence, or as RBNZ governor Graeme Wheeler put it in a recent speech, "Growth in real consumption per capita has averaged 1.6 percent pa in the current economic cycle – about ½ percentage point below the post-1993 average growth rate of 2.1 percent, despite the rapid increase in housing wealth...This more cautious consumer behaviour may reflect a reassessment of the ‘permanency’ of capital gains from household assets, and greater caution about the level and durability of future income growth".

Maybe. But I'd still be rather surprised if families, sitting on the biggest financial bonus of their lifetimes (especially in Auckland), continued to spend more slowly than usual. They may well (sensibly) discount the scale and the ultimate bankability of their winnings. But I don't see some wealth-related spendup being delayed for ever. Sure, some of it won't flow through to the GDP numbers: the new car and the trip to Melbourne go into the 'imports' box. But some of it will.

And on the capacity side, things are certainly tighter than they were: you could certainly read Stats' numbers on the recent slowdown in the growth of housebuilding (and of construction on general) as evidence that it's getting harder to assemble the crew for the next project. But on the other hand residential construction as a percentage of GDP isn't even up to past levels yet, as the chart below shows, and given the intense profit incentives to get houses onto the market, you'd expect us to go past previous peaks. My guess is that there's a dance in the old dame yet. And I also suspect (based on the technical economic methodology of Walking With Your Eyes Open Around The North Shore) that houses are going up quicker, which will help.

An economy that could well grow by 4.0% to 4.5% rather than the 3.5% that most analysts see in the cards would also part-explain a bit of an oddity - our low per capita GDP growth. In the June quarter our GDP (expenditure basis) was 3.8% up on a year earlier - but up by only 1.7% on a per capita basis. That was because the population grew by 2.1% (a natural increase of 28,200 plus net immigration of 69,100).

You look at that 1.7% per capita growth, and you could think two things. One is that it carries on our run of relatively slow productivity growth, and that's got to be right to some extent. But you could also think: hang on a sec. This isn't an economy with the look and feel of distinctly modest per capita growth. I appreciate that's an impressionistic judgement call, but I suspect the other leg to the apparently low per capita growth numbers is that they're a bit behind the actual pace of where the economy is (and is heading next).

It doesn't mean we've suddenly solved our slow-growth productivity problems. If anything, our reliance on construction in this cycle points them up: what we gonna do when the houses are up and the earthquake damage is fixed? And it doesn't mean that tomorrow's GDP number is going to be a little purler (any single quarter tends to have lumps in it). And 2016 was the year that gave us Brexit and Trump, so who knows what the next madness will be or what it might do to us.  But net net net, it wouldn't be too surprising if the next six to twelve months turned out rather better than currently expected.

Sunday, 18 December 2016

Good books - December '16

Surrounded by "isn't it awful", "the world is going to the dogs" types? Here are two antidotes: Nobel laureate Angus Deaton's The Great Escape: Health, Wealth and the Origins of Inequality and Johan Norberg's Progress: Ten Reasons to Look Forward to the Future. Both document the immense progress made in the past three hundred years by large parts of the world on multiple fronts - not just in living standards, but also in health, longevity, literacy, freedom, peace and global equality. Deaton's book in particular will remind you that a prime reason many poor countries have missed out is political: they are kleptocrat tyrannies (another reminder, if you haven't yet, to read Acemoglu and Robinson's Why Nations Fail), which is one of the reasons why Deaton is critical of foreign aid (it keeps the Mugabes going). He's got better ideas on how to help them, including making trade with the developed world easier. And Norberg is full of interesting facts, including that "285,000 more people have gained access to safe water every day for the past 25 years", and that 2,000 more people will have escaped from poverty in the time it takes you to read his first chapter.

I didn't profit from George Lakey's recent Viking Economics: How the Scandinavians Got It Right - and How We Can, Too. It's as if he went on a Seventies demo, fell asleep mid-chant - "The workers! United! Will never be.." - and woke up yesterday. And while good ideas on economic policy can and should come from anywhere and anyone, sociology isn't where I'd go looking first. It doesn't help that the "we" in the title is "the US", not "everyone", which means that when he compares Nordic health systems with America's, they're better, but then, whose isn't? So it's hard to draw conclusions about Nordic implications for everyone else. I'm pretty sure there are some good Scandinavian ideas we could pirate (particularly the Danish 'flexicurity' of jobs, and possibly the Finns' education ideas), but I wouldn't use this book as the instruction manual.

If you did want a good guide, try Helen Russell's The Year of Living Danishly: Uncovering the secrets of the world's happiest country. Great armchair travel from a very good freelance writer. One interesting fact is that by international standards Denmark is a high trust society - you can, and they do, leave your baby in the pram outside the restaurant - which is one reason they tolerate the government taking 54.6% of GDP: they trust their representatives to do the right thing with it. More than I could say about any recent New Zealand (or Aussie, British or Irish, let alone American) governments.

Speaking of Aussies, we don't get enough mainstream media coverage of their politics other than at moments of high drama (though there have been a fair few of those recently). I liked Annabel Crabb's Stop at Nothing: The Life and Adventures of Malcolm Turnbull: concise, punchy, well-informed. The back jacket summarises Turnbull as "colourful, aggressive, humorous and ruthless" in his pre-politics days, and looks at whether he's changed much since: not a lot, I'd say. He's also a good deal more interesting as a person than I'd imagined: it may not help his liberal-trapped-in-a-conservative-party day job much, but he'd make a good addition to most pub quiz teams.

Timothy Garton Ash's The File: A personal history is the story of what he finds when he reads the file the East German Stasi security service kept on him. He comes to a relatively generous conclusion about the 2% of the East German population who were informers for the Stasi - "What you find, here in the files, is how deeply our conduct is influenced by our circumstances...What you find is less malice than human weakness...when you talk to those involved, what you find is less deliberate dishonesty than our almost infinite capacity for self-deception" - without losing sight of the big point: "Yet the sum of all their actions was a great evil".

Boston must be the setting for more good thrillers per square mile than anywhere on the planet, the latest being Michael Harvey's Brighton (a Boston locality) where a Pulitzer prize winning journalist who'd escaped the poor Catholic Irish 'burb comes back to help his teenage friend, who is suspected of several murders. The blurb on the cover says "riveting and elegiac", and it is: fine writing. Harvey's also got a series about a Chicago based private eye, Michael Kelly: I've read the fifth of them, The Governor's Wife, which was also very good.

University of Wolverhampton professor Gary Sheffield has come out with Douglas Haig: From the Somme to Victory, an updated and revised version of his earlier (2011) The Chief: Douglas Haig and the British Army. It's a balanced account that gives Haig more credit than he usually gets, and particularly on the logistical side of running an enormous enterprise. As Sheffield notes (pp154-5), at its peak the British army in France had to feed 2,700,000 men: "To keep one division in the field for one day required 'nearly 200 tons dead weight of supplies', and Haig's army consisted of more than 60 divisions". Haig as chief executive comes out well; Haig as general, somewhat well, though I haven't been entirely shifted from the "lions led by donkeys" camp. You could argue that Haig's "one last push and we'll break though into open country" was indeed finally vindicated, but too many people died to get there. Then again, it's also hard to shake the thought that, with the technologies of the day, there was little alternative to an attritional strategy, however appalling the casualties became.

Military historian Allan Mallinson doesn't like the "lions led by donkeys" line (it's "facile"), but in his Too Important for the Generals: Losing and Winning the First World War he's not impressed by the generals' strategic grip: "nothing can acquit the high command of its failure to see beyond no-man's-land [on the Western Front] and its embrace of the 'strategy of attrition" (p330). He also believes that the politicians should have taken a stronger hold of the overall direction of the war, and in particular gone for more flanking initiatives (like a better run Dardanelles operation) as well as boosting support for Russia and Serbia, rather than letting Russia slide into revolution and Serbia lose to Austria. All of which reflects the still unsettled scholarship on the Great War: you no sooner read one book suggesting the generals were doing as well as they could than the next suggests the opposite.

In brief: anything Robert Harris turns his hand to (the life of Cicero; a dystopian world where Hitler won) is highly readable. You'll like Conclave, which (natch) is about a papal election. Carl Hiaasen's written a series of high-paced comic novels about Florida bizarrenesses: his latest, Razor Girl, is right up with the rest of them. And if you like private eye novels set back in the Roman Empire - and let's face it, who wouldn't - you've probably worked your way through Lindsey Davis' Falco and Flavia Albia series and John Maddox Roberts' SPQR series, but don't miss the equally good Russo ones by Ruth Downie. I've just finished the latest, the fifth in the series, Vita Brevis.