Australia needs an NGDP futures market

The Wall Street Journal sees Australia skirting on the edge of a recession:

SYDNEY””From the vast mining pits that dot Australia’s arid northwest to the multimillion-dollar luxury homes with views across Sydney Harbour, economists are seeing red flags that point to a looming economic slump.

Thousands of kilometers away, China is providing another cause for concern. The country buys roughly a quarter of resource-rich Australia’s exports. But its slowing economy translates into less construction of skyscrapers, bridges and railways””hurting demand for raw materials like iron ore.

The darkening outlook, underpinned by deeply disappointing data in recent days, has prompted several economists to warn that Australia””which has gone 24 years without any severe downturn””may finally be ripe for a recession, commonly defined as two straight quarters of contraction.

Some economists, including from UBS, Goldman Sachs and Morgan Stanley, believe the first contraction may already have happened””in the second quarter, for which data is due Wednesday.

Meanwhile, The Economist magazine’s panel of forecasters predicts good times ahead, with 2.4% RGDP growth for 2015, and 2.8% RGDP growth for 2016.

Who’s right?  I don’t know, and neither do you.  But this shows the need for market forecasts of 12 or 24 month forward NGDP.

PS.  Australia has never faced the zero bound problem and thus can easily avoid a NGDP collapse using conventional monetary policy, if it wishes to do so.

PPS.  After the WSJ piece was published, Q2 came in at 0.2%, and 2.0% over 4 quarters.

PPPS.  Suppose Australia had more recessions than the US; what would people say?  They’d say America has a well diversified economy, while Australia is reliant on the highly unstable global commodity cycle.  Instead Australia has far fewer recessions than the US, and my commenters tell me that’s because Australia relies on commodity exports.

HT:  Marcus Nunes


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24 Responses to “Australia needs an NGDP futures market”

  1. Gravatar of marcus nunes marcus nunes
    5. September 2015 at 06:01

    But Australia is courting “disaster” by letting NGDP slide below trend!
    Like others, they have frequently mentioned “asset (home) price bubbles!

  2. Gravatar of ssumner ssumner
    5. September 2015 at 06:08

    Marcus, I feel that Australia has established a new trend, lower than the old 6.5% trend line. But they are probably too tight for even the lower trend (somewhere around 4.5%)

  3. Gravatar of marcus nunes marcus nunes
    5. September 2015 at 07:59

    That seems right. They-re falling below the “new trend”, which is closer to 4%.

  4. Gravatar of Ray Lopez Ray Lopez
    5. September 2015 at 08:19

    Excellent points made by Sumner and Nunes. I haven’t much to add, except to say if a resource rich country is to be admired, it is Norway, which, despite having recessions more so than Australia, is way ahead of the latter. The ups-and-downs of an economy should not bother you, as long as the ups are more than the downs.

    Australia btw proves the rule that selling commodities is not always bad; e.g., the Economist once pointed out the reason Africa is so backwards is not so much due to selling commodities (among a bunch of other negatives of course) but that the rich countries subsidize their agriculture business, and dump their excess crops on Africa as humanitarian aid, which destroys the African commodities market.

  5. Gravatar of Jason Smith Jason Smith
    5. September 2015 at 09:38

    Australia (like Canada) seems to be similar to the US in the 1990-2000:

    http://informationtransfereconomics.blogspot.com/2015/06/sumner-is-confused-about-australia-i-am.html

  6. Gravatar of Rajat Rajat
    5. September 2015 at 13:03

    Apologies for this long comment.

    Australia has a central bank (the RBA) that is reluctant to cut the cash rate further to avoid ‘financial instability’ due to (as Marcus says) asset price ‘bubbles’ ‘popping’. RBA Governor, Glenn Stevens, has called Sydney house prices ‘crazy’: http://www.sbs.com.au/news/article/2015/06/10/sydney-house-price-boom-crazy The media release accompanying every monthly RBA policy decision refers to property prices, particularly Sydney’s: http://www.rba.gov.au/media-releases/2015/mr-15-15.html

    To me, it seems the RBA wants a certain type of ‘handover’from mining investment to other forms of growth. It seems comfortable with some increase in private consumption, but not too much. Stevens recently said:

    “But the bigger point is that monetary policy alone can’t deliver everything we need and expecting too much from it can lead, in time, to much bigger problems. Much of the effect of monetary policy comes through the spending, borrowing and saving decisions of households. There isn’t much cause from research, or from current data, to expect a direct impact on business investment. But of all the three broad sectors – households, government and corporations – it is households that probably have the least scope to expand their balance sheets to drive spending. That’s because they already did that a decade or more ago. Their debt burden, while being well serviced and with low arrears rates, is already high. It is for this reason that I have previously noted some reservations about how much monetary policy can be expected to do to boost growth with lower and lower interest rates. It is not that monetary policy is entirely powerless, but its marginal effect may be smaller, and the associated risks greater, the lower interest rates go from already very low levels. I think everyone can see that.”
    http://www.rba.gov.au/speeches/2015/sp-gov-2015-06-10.html

    Stevens’ RBA deputy, Phil Lowe, recently said:

    “I suspect that it is unlikely to be in our national interest for this more prudent approach to give way to household consumption once again growing consistently much faster than our incomes. This is something we continue to be cognisant of in the setting of monetary policy. Some decline in the rate of household saving is probably appropriate as the economy rebalances after the terms of trade and mining investment booms. But, given the position of household balance sheets, it is unlikely to be in our long-term interest for a consumption boom to be financed by a pick-up in household borrowing.”
    http://www.rba.gov.au/speeches/2015/sp-dg-2015-08-12.html

    However, it’s clear the RBA would love to see an increase in non-mining investment. RBA speeches frequently exhort businesses to invest in a similar manner as you once criticised Mark Carney for saying to Canadian businesses. For example, see this speech from Stevens last August:

    “But the thing that is most needed now is something monetary policy can’t directly cause: more of the sort of ‘animal spirits’ needed to support an expansion of the stock of existing assets (outside the mining sector), not just a re-pricing of existing assets. There are some encouraging signs here. Nonetheless, if reports are to be believed, many businesses remain intent on sustaining a flow of dividends and returning capital to shareholders, and less focused on implementing plans for growth. Any plans for growth that might be in the top drawer remain hostage to uncertainty about the future pace of demand.”
    http://www.rba.gov.au/speeches/2014/sp-gov-200814.html

    The RBA would also like to see an increase in exports. The Governor’s monthly statements invariably refer to the level of the dollar and until very recently (with the AUD now down to US 70 cents from $US1.05 in 2011-13), included statements that “further depreciation seems both likely and necessary”: http://www.rba.gov.au/media-releases/2015/mr-15-11.html

    Finally, while statements in support of supply-side economic reform are always welcome, to me it seems this recent speech by Stevens is a bit cheeky:

    “Growth is important. And for a while now, there has not been quite enough growth. There has been growth, and more than in many countries. But, recent labour market outcomes notwithstanding, not as much as we ought to be capable of. ”

    Followed by:

    “Reasonable people get this. They also know, intuitively, that the kind of growth we want won’t be delivered just by central bank adjustments to interest rates or short-term fiscal initiatives that bring forward demand from next year, only to have to give it back then. They are looking for more sustainable sources of growth. They want to see more genuine dynamism in the economy and to feel more confidence about their own future income.”

    http://www.rba.gov.au/speeches/2015/sp-gov-2015-08-26.html

  7. Gravatar of Michael Michael
    5. September 2015 at 14:47

    Australia has floating interest rates…. (i.e mortgages are floating, not 30yr fixed) a hugely powerful stabiliser that usa economists never seem to recognise or discuss, as it is a very different system to usa.

  8. Gravatar of benjamin cole benjamin cole
    5. September 2015 at 16:18

    The Reserve Bank of Australia targets inflation in a band of 2.5% to 3.5%.

    While I prefer NGDPLT, an IT band is probably an okay second choice…if it is a target not a ceiling.

    Perhaps the IT band just needs to be budged up.

  9. Gravatar of Lars Christensen Lars Christensen
    5. September 2015 at 23:06

    Scott, Australia has a NGDP futures markets – or rather CRB denominated in Aussie dollars is a very good “real-time” indicator of future NGDP growth.

    See here: http://marketmonetarist.com/2012/11/19/the-export-price-norm-saved-australia-from-the-great-recession/

  10. Gravatar of ssumner ssumner
    6. September 2015 at 04:51

    Ray, That’s right, the resource curse is probably a myth. Well governed countries with resources do fine.

    Ben, I believe it’s 2% to 3%.

    Lars, That’s useful, but I still think NGDP futures would be better.

  11. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    6. September 2015 at 07:30

    According to Nima Sanandaji, Norway and its Nordic neighbors haven’t been all that well governed (until lately, when they saw the folly of their ways);

    http://www.iea.org.uk/sites/default/files/publications/files/Sanandajinima-interactive.pdf

    ‘The development of Scandinavian welfare states has led to a deterioration in social capital [that had been built up over centuries, due to those cold dark winters]. …. A survey from 2001 showed that 44 per cent believed that it was acceptable to claim sickness benefits if they were dissatisfied with their working environment. Other studies have pointed to increases in sickness absence due to sporting events. For instance, absence among men due to sickness increased by 41 per cent during the 2002 football World Cup.’

    Back in 1981-84, surveys of Swedes showed 82% agreement with the statement, ‘claiming government benefits to which you are not entitled is never justified.’ By 2010-14 that was down to 55%.

    Sweden has recently reversed course, but Norway hung on as long as they had high oil revenues to fund their socialism. Now that that’s changed….

  12. Gravatar of benjamin cole benjamin cole
    6. September 2015 at 07:38

    Scott– yes I meant maybe 2.5 to 3.5% would be better. ..

  13. Gravatar of Ray Lopez Ray Lopez
    6. September 2015 at 07:58

    Sumner: “Ray, That’s right…” – when’s the last time you saw that in print on this blog, reader?

    MF – there’s hope for you yet…you can get Sumner to respond to you, you just have to deprogram yourself from all that Austrian nonsense, lol.

  14. Gravatar of bill bill
    6. September 2015 at 08:30

    I have a couple of questions about the US.
    My understanding is that the Fed says the current Fed Funds rate is 0% to 0.25%. If that’s the case, what do they mean when they raise a quarter point? Will it be “0.25% to 0.50%”? Or are they going back to just having a single target and will that probably be 0.50%?
    If the Fed lowered IOR back to 0.00% at the same time, would the net effect be stimulative, contractionary or undeterminable?

  15. Gravatar of W. Peden W. Peden
    6. September 2015 at 11:51

    Patrick R. Sullivan,

    Interesting statistics, but I’m wary of ascribing general trends (a decline in communitarian feeling and increased social atomism) to particular policies. One can argue that these are consequences of modernity more generally: greater opportunities for individuals to select their communities, greater scrutiny of social taboos, greater discretionary income in the hands of ordinary people etc.

    Norwegian governance might have had little effect either way. I haven’t read the relevant literature, and I don’t know.

  16. Gravatar of Australia tries to find “balance” | Historinhas Australia tries to find “balance” | Historinhas
    6. September 2015 at 12:18

    […] note that NGDP growth has done a lot of “swinging” after the crisis hit. Scott Sumner thinks that the RBA has “chosen” a lower growth rate for NGDP. That may be right, and I put […]

  17. Gravatar of Blair Blair
    6. September 2015 at 13:25

    Over that 24 year period Australia has had a huge run-up in immigration, from about 200k long term arrivals in 1991 to 800k in 2013. Net long term arrivals have peaked but are still about 300k or close to 1.5% of the population. Consensus among domestic economists is that the short run effect of the influx is stimulatory i.e. short rates would be lower without immigration. This may subside over the medium term, for various reasons, making things harder for the RBA.

  18. Gravatar of Rajat Rajat
    6. September 2015 at 16:27

    Scott, I wrote a long comment on Saturday your time that seems to be stuck in moderation (it had lots of links). The basic point was that the RBA seems to be seeking a very specific type of ‘handover’ from mining investment to other forms of growth.

    First, it is very focussed on ensuring ‘financial stability’ and frequently mentions Sydney house prices in its monthly decision statements. For example, from its July statement:

    “Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market.”

    Second, the RBA is sceptical of the likelihood and benefits of higher private consumption to replace mining investment. This is from a June speech by Governor, Glenn Stevens:

    “But the bigger point is that monetary policy alone can’t deliver everything we need and expecting too much from it can lead, in time, to much bigger problems. Much of the effect of monetary policy comes through the spending, borrowing and saving decisions of households. There isn’t much cause from research, or from current data, to expect a direct impact on business investment. But of all the three broad sectors – households, government and corporations – it is households that probably have the least scope to expand their balance sheets to drive spending. That’s because they already did that a decade or more ago. Their debt burden, while being well serviced and with low arrears rates, is already high. It is for this reason that I have previously noted some reservations about how much monetary policy can be expected to do to boost growth with lower and lower interest rates. It is not that monetary policy is entirely powerless, but its marginal effect may be smaller, and the associated risks greater, the lower interest rates go from already very low levels. I think everyone can see that.”

    And this from deputy governor, Phil Lowe, last month:

    “I suspect that it is unlikely to be in our national interest for this more prudent approach to give way to household consumption once again growing consistently much faster than our incomes. This is something we continue to be cognisant of in the setting of monetary policy. Some decline in the rate of household saving is probably appropriate as the economy rebalances after the terms of trade and mining investment booms. But, given the position of household balance sheets, it is unlikely to be in our long-term interest for a consumption boom to be financed by a pick-up in household borrowing.”

    However, the RBA would love an increase in non-dwelling business investment and frequently laments the lack of it, striking a tone similar to what you derided in Mark Carney when he exhorted Canadian businesses to invest (“putting money to work”).

    Here’s Glenn Stevens last year:

    “But the thing that is most needed now is something monetary policy can’t directly cause: more of the sort of ‘animal spirits’ needed to support an expansion of the stock of existing assets (outside the mining sector), not just a re-pricing of existing assets. There are some encouraging signs here. Nonetheless, if reports are to be believed, many businesses remain intent on sustaining a flow of dividends and returning capital to shareholders, and less focused on implementing plans for growth. Any plans for growth that might be in the top drawer remain hostage to uncertainty about the future pace of demand.”

    The RBA would dearly love more export-driven growth as well, and until this month (when the AUD fell to US 70 cents down from $US1.05 in 2012), would regularly include lines in their monthly statements like, “further depreciation is likely and necessary…”

    I could go on but you get the idea.

  19. Gravatar of Major.Freedom Major.Freedom
    6. September 2015 at 17:57

    Sumner wrote:

    “Meanwhile, The Economist magazine’s panel of forecasters predicts good times ahead, with 2.4% RGDP growth for 2015, and 2.8% RGDP growth for 2016.”

    “Who’s right? I don’t know, and neither do you. But this shows the need for market forecasts of 12 or 24 month forward NGDP.”

    No it doesn’t. The idea that there is a need for NGDP futures is not derived from there being more than one forecast of RGDP in the world.

    By that non-empirical logic, there would be a “need” for Kardashian futures since there is more than one opinion on whether one will get married or divorced.

    What actually establishes a need for any sort of futures is when trading them represents a gain to the buyers and gain to the sellers that exceeds the costs to the buyers and costs to the sellers, and in addition, there has to be an awareness of the above, and moreover, there has to be an opportunity.

    In the case of Australia, the costs clearly exceed the benefit, because while there is awareness and opportunity, the lack of trading indicates that investors don’t value them. Indeed, they are so little valued that everything investors are doing in their lives, is worth more to them than trading NGDP futures. Reading the Wall Street Journal, or taking naps, or watching reruns of Jersey Shore, is evidently more valuable than trading NGDP futures.

    Of course all this proves the market is stupid and ignorant, which is why it needs Sumner’s version of central banking good and hard. People are too stupid to set the right prices given future spending, why not threaten them with violence which is needed to ensure central banks exist?

  20. Gravatar of Ray Lopez Ray Lopez
    7. September 2015 at 02:40

    @MF – quite fighting Sumner. Submit to his will…assimilation by the NGDPLT Borg is not as bad as it seems. Resistance is futile…

  21. Gravatar of ssumner ssumner
    7. September 2015 at 05:05

    Rajat, Sorry that got held up, I’ve been having increasing problems with that. Very good quotes, and I’ll do a post on that.

    A quick response here. They seem to assume that monetary policy works by stimulating credit, whereas it actually works by boosting NGDP. The optimal solution is to use monetary policy to boost NGDP and regulation to control consumer debt, if that is in fact a problem. Thus in the US, debt and equity should be taxed equally, which would mean a big tax cut on equity financed investment and a big tax increase on debt financed investment.

    Patrick, Everything is relative. Norway is better governed than at least 90% of the countries in the world, even better than most European countries. My point is you don’t have to be governed like Nigeria or Venezuela or Libya, just because you have lots of oil.

    Blair, I agree.

  22. Gravatar of Postkey Postkey
    8. September 2015 at 01:49

    Rajat

    They may be right to assume that monetary policy works by stimulating credit?

    http://eprints.soton.ac.uk/339271/1/Werner_IRFA_QTC_2012.pdf

  23. Gravatar of Matt McOsker Matt McOsker
    8. September 2015 at 14:46

    Bill Mitchell, from Australia, has been spot on so far IMO:

    http://bilbo.economicoutlook.net/blog/?p=31735

  24. Gravatar of Australia Tries to Find ‘Balance’ | The Corner Australia Tries to Find ‘Balance’ | The Corner
    8. September 2015 at 22:01

    […] note that NGDP growth has done a lot of “swinging” after the crisis hit. Scott Sumner thinks that the RBA has “chosen” a lower growth rate for NGDP. That may be right, and I put […]

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