Last week Reserve Bank economist Paul Conway said that to fight inflation the country needed better economic data. He complained that last week’s GDP data was more than two and a half months old. Conway said: “Sometimes it can be difficult to tell what’s going on.”
Like the French High Command who refused to install a telephone, the Reserve Bank refuses to install an app that would tell the bank what is going on.
Last week I wrote that the ANZ Bank Truckometer gave a better indication of economic activity than out-of-date GDP data. Readers told me there is a much better indicator, an app developed at Massey University in 2018. I downloaded the app.
The GDP Live app gives an accurate estimate of gross domestic product in real time. The app even gives regional breakdowns. How is this possible? I was so amazed I have investigated.
For another viewpoint: Canny View: What is GDP and why is it important?
It is an enormously encouraging story while at the same time discouraging. All that is best about New Zealand and what is worst.
What is encouraging is New Zealand has invented AI-driven software to discover what today’s GDP and inflation are.
What is discouraging is I predict our government likely won’t use it or will only use the app when it’s widely adopted overseas and then probably only a version developed by big tech.
This is not unusual. As the Bible says, “A prophet is not without honour except in his own country”.
It is also an example of how AI is going to transform our world.
Dr Christoph Schumacher, a professor in Innovation and Economics at Massey University, thought there must be a way to discover what GDP is rather than waiting up to six months for the government to publish the data.
He asked NZTA for the daily traffic count. Then he asked the ports, the payment companies and other businesses to give him their daily data. Every night at 2am terabytes of data are received by five servers at the university.
The professor took nine years of previous data and using an algorithm and machine learning, discovered how to calculate the daily GDP.
Last week Stats NZ said in the first quarter GDP grew 0.2%. On April 1 Professor Schumacher’s app said annual GDP was 0.2%. The app’s daily estimate of annual GDP is extraordinarily accurate.
Schumacher realised that if he could measure GDP in real time, he could also measure price movements and find today’s inflation. Here, too, the app is very accurate.
Because it is machine learning, the more data it receives, the more calculations it makes and the better the results.
The professor also realised he could use the data and the Taylor rule to estimate what the Official Cash Rate (OCR) should be to achieve inflation of 2%.
Schumacher is no politician. He went back and calculated what the OCR should have been to keep inflation at 2%. His chart shows that for about 20 years, successive Reserve Bank governors have kept the OCR at the level the Taylor rule says is necessary for inflation to be 2%.
The present governor in 2021 set the OCR at levels the Taylor rule predicts would result in runaway inflation, which is what we got. In my opinion, our inflation is nothing to do with Covid-19, supply shocks or the Ukraine War. Just reckless monetary policy.
The app predicts that for inflation to be at 2%, the OCR should be 5.7%, close to the bank’s 5.5%. But looking at the chart, it’s a coincidence. The app’s chart shows inflation is falling rapidly, whereas last week the Reserve Bank’s economist predicted inflation would be sticky.
Last Friday the app stated that annual GDP is 0.13%. Inflation is 3.71%.
When I was a Finance Minister this app would have been invaluable. The Reserve Bank is understood to be considering the app. Other countries are looking at it.
The US Atlanta Federal Reserve has sent someone from America. Singapore is exploring replicating the platform. The professor has been asked to present to the German Central Bank.
Downloads are increasing as business realises the value of knowing today what GDP and inflation are. The app is transforming economic decision-making. It is a discovery worthy of the Nobel Prize in economics.
