Adding up the GDP errors of RBA’s ways

The Reserve Bank got it wrong. The important question is, did it matter? More importantly, is the RBA still getting it wrong?

The Reserve Bank got it wrong. The important question is, did it matter?

The even more important question is whether the RBA is still getting it wrong.

So the really important questions derive from that. If it is, when does it realise that, what does it then do and how quickly, and what are the consequences?

It is important to understand two things.

First, what the RBA got wrong was yesterday; we obviously do not and cannot know whether it is right or wrong about the future and the 2019 year in most important particular. In a not exactly incidental sense, all that is now largely “just history”; it’s the future that counts.

Second, what the RBA got wrong was the big picture GDP bottom line. It pretty much accurately understood the components; they just didn’t “add up” to the right number.

It did, though, get the “big number” GDP wrong for the second half of 2018 in prediction, in real-time as it was taking place, and — most relevantly for where we are now — when it came just a month ago to “predict the past”.

As we now know — albeit, with an asterisk — the official ABS data showed through-year GDP growth of 2.3 per cent for calendar 2018 and year-on-year of 2.7 per cent.

In May last year the RBA had predicted through-year growth of 3.25 per cent and 3 per cent year-on-year. In August it ticked the year-on-year growth prediction up to 3.25 per cent. In November, as the year was drawing to a close, it went for broke, ticking them both up to 3.5 per cent.

That’s a big miss. It was even bigger in the second half on its own. Broadly, the RBA had been predicting second-half annualised growth would slow from the 3.75 per cent or so of the first half to around 2.75 per cent. On Wednesday, it was shown as 1 per cent.

At least, and this is not said pejoratively as it feeds into why the RBA got it wrong, it got the direction right.

Further, to be fair, the RBA made, had to make, both its August and its November predictions before it had any official GDP data for the second half.

It only got to see — like the rest of us — the very modest 0.3 per cent September quarter growth figure in December; and even then only the day after its last policy meeting for the year.

Oh, to be in China, where the GDP numbers come out two weeks after the quarter ends; and where in any event official prediction and official outcome are essentially the same thing.

The September quarter did prompt the RBA to slash its final “forecasts” for 2018, forecasts now of the past, to 2.75 per cent through-year and 3 per cent year-on-year.

They were still too high, but let’s note my asterisk: over time the gap could narrow or disappear with ABS adjustments.

That’s the substantive question, both to the RBA’s understanding of where the economy has been and where it is now headed.

In substance, the sluggish December quarter aggregate number was not a surprise. Broadly, it comprised a slump in residential construction, negative export volumes (but good export prices, flowing into very positive nominal GDP growth) and sluggish consumer spending.

The RBA’s “predictive gap” was that strong aggregate wages growth — strong jobs growth plus modest wage rises — did not flow into higher consumer spending.

So I would argue that the RBA getting the GDP number wrong didn’t matter — unless, it turns out that it is still too optimistic and so now behind the game.

Precisely because it, correctly, anticipated continued strong jobs growth and there was nothing it could do about either export demand or residential construction, one or even two interest rate cuts late last year would not have substantively changed either the statistical outcomes or more importantly the real-world economy.

However, if the economy has turned, cuts last year would have been appropriate and pre-emptive; albeit arguably somewhat marginally so and could largely be rectified in this half.

But the main real-world measure — and guide — is jobs; indeed, jobs and yet more jobs.

It might be a puzzle — the contradiction between the sustained strong jobs growth and other forward-looking indicators like vacancies and the weak consumer spending and aggregate growth — as RBA governor Philip Lowe noted — but it remains the core domestic reality.

The two big global uncertainties are outside the RBA’s call and ability to influence — China’s growth and the Fed and global financial markets. It can only really respond, hopefully with some pre-emption.

And in this context, I’m much happier that the RBA will still be starting from 1.5 per cent, rather than 1 per cent or indeed as some would wish, zero.

A final point on that so-called “per capita recession” — two quarters of negative GDP growth per capita.

It’s as nonsensical as the so-called “technical recession” — the two quarters of negative overall GDP growth. Chris Bowen, who leapt to it, though, does have a point, just not the political one he was trying to make.

It emphasises how so much of our “miracle’’ growth has been built on the population Ponzi. How 3 per cent-plus overall growth rates — and even the much vaunted 28 years of unbroken growth — is an illusion.

Adjusted for population, turned frenzied over the past decade, we’ve done little better than zero-population growth near zero-GDP growth Japan; managing though to achieve the astonishing feat of rendering Melbourne and Sydney arguably less liveable than the world’s biggest megacity, Tokyo.

I do invite Bowen in his new found zeal for per-capita measures to apply the same logic to the proposed CO2 emission cuts. How the government’s supposedly pathetic 26-28 per cent cut is among the world most punishing at closer to 50 per cent in per capita terms. While Labor’s proposed 45 per cent is Rudd-Gillard-Swan (and now Bowen?)-level beyond bonkers.