OPINION
Welcome to Inside Economics. Every week, I take a deeper dive into some of the more left-field economic news you may have missed. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select ‘My newsletters’. For a step-by-step guide,
Q: There will be plenty of focus on GDP this week and what it means for the economy. But what actually is GDP, what does it represent and how relevant is it really?
— Name withheld
A: Good point. It’s always worth clarifying what all the fuss is about with a big set-piece news announcement like the one we’ll get on Thursday.
First of all, GDP stands for gross domestic product. It includes some gross products, like New Zealand’s sizeable edible offal output, but includes all the other stuff we produce as well.
“[GDP] counts all of the output generated within the borders of a country. GDP measures the monetary value of final goods and services —that is, those that are bought by the final user—produced in a country in a given period of time (say a quarter or a year).”
Here’s the International Monetary Fund’s official definition:
“[GDP] counts all of the output generated within the borders of a country. GDP measures the monetary value of final goods and services — that is, those that are bought by the final user — produced in a country in a given period of time (say a quarter or a year).”
So, basically, GDP counts everything produced in the country that is bought and sold with money.
There’s been a bit of controversy in recent years about what it doesn’t count.
Former National Party politician-turned-academic Marilyn Waring has written extensively on the notion that GDP is inherently sexist because it fails to capture and value work that is done in the home — traditionally by women — that is clearly of great value to society.
There are also other hugely valuable human activities that GDP largely ignores, like charity work. Then there’s the black market, the underground economy of illicit goods that aren’t captured by official accounts.
And of course, GDP doesn’t really measure happiness or wellbeing. But, for almost a century now, it has been used as a de facto measure of economic success. If GDP is growing, then we consider the country is doing well.
If it contracts for more than six months at a time, we say we are in recession and we all get very gloomy.
Ironically, that’s something the modern pioneer of GDP, economist Simon Kuznets, warned against.
Kuznets, a Russian-born economist who moved to the US in the 1920s, codified the accounting of economic activity in 1934.
But even he was sceptical about using his measurement system to assess the overall welfare of people. “The welfare of a nation can scarcely be inferred from a measurement of national income,” he said.
“Distinctions must be kept in mind between quantity and quality of growth, between its costs and return, and between the short and the long term. Goals for more growth should specify more growth of what and for what.”
In other words, he was making the case that we should look more closely at the quality of growth rather than just the quantity.
But unfortunately, the idea of GDP as a score sheet for economic progress was simply too appealing to politicians and the public. After being adopted as an official measure following WWII, it took a hold in the popular imagination that it retains to this day.
Efforts to broaden the focus of officials to look at more holistic measures have been promoted in the past few years.
American economist Richard Easterlin developed something called the Easterlin paradox. He found that while incomes had more or less doubled over time, happiness levels hadn’t moved.
So, as countries moved from poor to wealthier, national happiness rose for a while. But there was a point where it plateaued and stopped growing even as people got wealthier. Adding more wealth no longer added to other measures of personal wellbeing.
The notion of measuring wellbeing has been adopted by various governments around the world, not least our own.
The NZ Treasury uses a Living Standards Framework dashboard to try to measure broader drivers of wellbeing — such as environmental conditions, social cohesion and public health.
Former Finance Minister Grant Robertson introduced this as a framework for his “wellbeing” Budgets in 2019. Finance Minister Nicola Willis has made it clear she has not continued with that approach, instead preferring to focus firmly back on the hard numbers.
Other flaws
There are a couple of other flaws with GDP data that are often highlighted by critics.
One is that it doesn’t account for population growth. If we add more people to an economy we get more economic activity. That can flatter the underlying performance of the economy. That’s what has happened in the past couple of years in New Zealand as we’ve experienced the biggest net migration gains in our history.
Of course, it is simple maths to work out a per-capita GDP figure and any decent coverage of GDP should do that in my view.
There are also some issues with timing and accuracy. GDP data takes a long time to collect and is often subject to revision.
The data we get on Thursday morning will be for the second quarter of the year, from March to June. A lot has changed since then, we’ve seen inflation fall and the first cut to the Official Cash Rate. So the data won’t tell us much about what is happening now.
It is also likely we’ll see revisions to earlier quarters of data that might change the annual rate of growth from what was previously assumed.
That can sometimes mean we weren’t really in a recession when we thought we were, or vice versa. If nothing else, that’s a reminder that the focus on technical recession is not necessarily a great way to measure how individuals are doing.
We should remember that the economy boomed briefly during the Covid stimulus. But it was inflated growth and we paid for it with higher inflation. Even if GDP looked great, many people were feeling poorer.
For all that, though, I still see a place for the old-school measurement of GDP.
It reflects all the biases and imperfections of capitalism.
But as long as we’re going to keep using a capitalist system, it is important to keep track of it. We do need to count how many more widgets we’ve made and sold this year compared with last.
GDP is good at measuring technological progress, for example. It measures the houses we build and the cars we manufacture. It measures the beer we drink and the movies we watch. It provides a benchmark of overall output to build on.
It might not be the most timely data, but when we want to look at the overall direction the economy is travelling in and think about where we need to focus to improve it, GDP is still one of the most important data sets we get.
So what will GDP for the second quarter look like when it lands at 10.45am on Thursday? Not great is the short answer. You can check out my full GDP preview here.
Economists are picking that the economy shrank 0.1-0.5% during the quarter. The Reserve Bank’s pick was a 0.5% contraction.
That probably won’t put us in a technical recession (because we bounced into positive territory in the March quarter). However, there is always the outside chance of a large revision to the March number, which was up only 0.2%.
And as columnist Matthew Hooton has pointed out, we’ve been in a per-capita recession for about 18 months now. So, regardless of the bouncing top-line number, the whole period has felt recessionary.
Later today we’ll get the balance of payments data from Stats NZ for the June quarter. This will include the size of New Zealand’s current account deficit — something that will probably be looked at by financial markets and international rating agencies more closely than GDP.
I took a close look at what the current account is, and why it matters, back in an earlier column. The short version is that the current account is a measure of the money flowing into and out of the country.
The easiest bit to understand is the inflow of foreign exchange we earn from exports and the outflow we spend on imports. This is a component of the current account that is also described as the trade balance.
But the current account also includes things like business profits and investments flowing in and out of the country. So, for example, the fact that the banks in New Zealand are largely foreign owned means their multibillion-dollar profits represent a big drain on our current account.
It’s one of the reasons New Zealand is always on the back foot when it comes to trying to run current account surpluses (ie take in more money than we spend).
The current account deficit most recently peaked at 8.8% of GDP in December 2022. Unsurprisingly, turning off the entire tourism industry caused a bit of a shortfall in foreign exchange earnings.
Anything above 10% is considered a bad look for a country our size and might see us cop a credit downgrade — pushing up borrowing costs (which can become a downward spiral).
But the deficit has been gradually improving since then.
Here’s what ANZ economists are expecting today:
“The annual current account deficit is expected to narrow 0.2% pts to 6.6% of GDP. We can’t forecast revisions, but historical revisions to travel services exports could be worth around 0.3% pts off the annual current account deficit and the risks are skewed to a narrower deficit than forecast. Nonetheless, the deficit would still be a fair distance from sustainable levels.”
Eventually, all deficits become unsustainable because we have to keep borrowing to make up the shortfall. It would be nice to occasionally earn more than we spend as a nation.
We did have a surplus briefly during the first lockdown in 2020, simply because we stopped driving and imports of petrol and many other things dropped away faster than exports fell.
But, unless something that radical happens again, there isn’t much prospect of a surplus on our horizon.
There’s one more big economic event to preview this week. Early on Thursday morning (6am NZT), US Federal Reserve chairman Jerome Powell will deliver the Fed’s latest rate decision. It’s all but certain he will deliver the first rate cut since March 2020, when it slashed rates to near zero on pandemic concerns.
The question is whether the Fed kicks off with a double 50-basis-point cut or just a single 25-point cut. This week the Herald ran a Financial Times feature looking at Powell’s dilemma.
It’s tricky because there are signs the US economy is slowing and could face a recession if rates aren’t cut, but it has also outperformed expectations and there are still some risks that inflation could flare up again.
What does it mean for us in New Zealand? Why should we care?
The first rate cut will be viewed as a turning point for the US economy and, to some extent, the global economy.
One reason we should care in New Zealand is the impact US rates have on financial markets.
I’m always interested in the Wall Street reaction to US Fed decisions. That’s partly a professional interest, but also because when Wall Street stocks are sold off my KiwiSaver balance usually falls as well.
US markets are keen to see rates come down. They had a minor meltdown in August when the rate wasn’t cut.
If the Fed cuts by 50 points, investors will probably celebrate. If it cuts by only 25 points, it’s hard to say what will happen. At the time of writing, market expectations are it will be the smaller cut.
But it’s still possible that will leave investors disappointed and in sell-off mode. A lot will hang on the tone Powell takes and the clues he offers on the path of cuts from here.
There are other reasons Kiwis might be interested in what happens to US rates.
Lower US rates may help keep downward pressure on local mortgage rates because a significant portion of local bank funding still has to be raised offshore, so cheaper US borrowing helps.
US rates also typically have some impact on the exchange rate. If our rates fall faster than those in the US, our currency will be cheaper against the US dollar. If our rates stay higher and the US rates fall faster, then our dollar would be worth more versus the greenback.
With the Reserve Bank expected to cut again on October 9, it’s more or less a downhill race now.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select ‘My newsletters’. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
BGH's tilt at Tourism Holdings has sparked more merger and acquisition speculation.