Part of the Cambridge A2 syllabus studies Macro Economic conflicts of Policy Objectives. Here I am looking at GDP, Unemployment, and Inflation (improving Trade figures is another objective also). The objectives are:
* Stable low inflation with prices rising within the target range of 1% – 3% per year
* Sustainable growth – as measured by the rate of growth of real gross domestic product
* Low unemployment – the government wants to achieve full-employment
New Zealand Growth, Jobs and Prices — 3 Key Macro Objectives Inflation, jobs and growth
1. Inflation and unemployment:
From the graph above you can see that low levels of unemployment have created higher prices – demand-pull inflation. Also note that as unemployment has increased there is a short-term trade-off between unemployment and inflation. Notice the increase in inflation in 2010-2011 as this is when the rate of GST was increased from 12.5% to 15%. Also today we have falling inflation (0.4% below the 1-3% band set by the RBNZ) and unemployment is on the rise – approximately 6%
2. Economic growth and inflation
With increasing growth levels prices started to increase in 2007 going above the 3% threshold in 2008. This suggests that there were capacity issues in the economy and the aggregate supply curve was becoming very inelastic. In subsequent years the level of growth has dropped and with it the inflation rate.
3. Economic Growth and Unemployment
With increasing levels of GDP growth unemployment figures have tended to gravitate downward. This was apparent between 2006-2008 – GDP was positive and unemployment did fall to approximately 3.6%. From 2009 onwards you can see that growth has been positive with unemployment falling. 2015 saw the unemployment rate rising with lower annual growth rate.
Below is a useful graphic from the BNZ and some commentary on the New Zealand milk production forecasts.
Looking ahead, we continue to anticipate international price improvement into 2016 as a strong El Nino weather pattern dents NZ production and pushes up the global price of wheat. The BNZ forecast a 6% fall in NZ milk production for the 2015/16. This anticipated weather effect is expected to amplify a decline in NZ production already in train via fewer cows and low milk prices discouraging supplementary feeding. A large hit to NZ production could see prices rise swiftly. But, with EU production quotas now removed, more EU product would be expected to prevent prices from swinging as sharply higher as we have seen in previous years when NZ production was restricted.
Below are some interesting graphs and comments from a recent ANZ Bank presentation which address the issue of
Both cyclical and structural factors seem to have played an important role in the recent recession. From a cyclical point of view output and the unemployment rate of the economy reflect this and should recover to pre recession levels. Structural change involves the shift of resources from slower growing areas of the economy to faster growing areas. Indicators such as the savings rate and employment in the different sectors of an economy, seem to be driven more by structural changes and might not return to levels seen before the recent recession.
Economists spend a lot of time talking about the “cycle”, but this can be at the expense of the “trend”.
- And isn’t it the trend that is more important for businesses?
- We can get bogged down in the detail and forget about some of the high level themes that dominant
- Often these trends or themes can be relatively clear. But a lot of the time they are not.
- Arguably, today’s economic backdrop is one where there are more questions over the overarching trends than the cycle itself (although that is not that clear either!).
I got this very informative image from a colleague. Put together by the ANZ Bank it shows how New Zealand, Australia, USA, Euro area and the UK rank over a range of variables. How it works is that 1st place in each category shaded dark blue, 2nd place shaded light blue, and last place shaded red.
When they are combined the overall rank has: 1st New Zealand – 2nd Australia. However in the major indicators of Growth, Inflation and unemployment has Australia ranked one in each. As for the Euro area it is ranked last in three categories and ultimately last overall. A useful exercise for students would be to research these categories in major economies and get them to rank them as below.
There has been research to suggest that climatic conditions can have a significant effect on economic growth although they tend to be inconsistent. A paper published by the journal Nature suspects that researchers in the past have been looking at the directly relationship between temperature and economic growth. In this paper they approached the research looking for an optimal temperature, on the assumption that both extreme cold and extreme heat can harm growth. Researchers found that:
Hotter-than-usual years benefit countries, rich and poor alike, up to an average annual temperature of 13°C, after which hotter weather begins to reduce growth.
This data allowed them to deduce the likely effect of climate change – see chart.
Brazil – an increase in temperature of 3°C (from 22°C to 25°C) = GDP 3% down
Germany – an increase in temperature of 4°C (from 9°C to 13°C) = GDP 1% up
As countries like Germany and France are on the colder side of the optimum (13°C) they tend to grow faster in hotter years in contrast to the USA and Australian whose normal temperature is the hotter side of 13°C. Some economists have argued that with global temperatures changing there is no firm baseline for comparison. However in the primary sector the growing of agricultural produce is most productive at particular temperatures. In the US those involved in jobs such as construction and manufacturing tend to leave work an hour earlier when the temperature rose above 29°C. Therefore in order to maintain the hours worked either more people have to be employed or employees are paid extra. It is estimated that 28% of the US workforce are exposed to the weather so this may mean higher costs for businesses.
Global warming also means that the sea-level will rise and countries and cities face the decision as to whether to build costly flood defences or accept the consequences. Moreover, even if rich countries manage to fend off the worst effects of global warming, they will still feel its repercussions. Trade with more vulnerable places would decline; refugees would proliferate.
If the global economy continues to function in a smilier vein to the recent past. climate change is expected to reshape the global economy by substantially reducing output and amplifying inequalities relative to a world without climate change. Innovation or defensive investments might reduce these effects but social conflict or disrupted trade – either from political restrictions or correlated losses around the world – could worsen them.
Nature- Global non-linear effect of temperature on economic production – 15th September 2015
The Economist – Putting Goldilocks to work – 24th October 2015
For many countries giving refugees cash has been a low priority as a policy to reduce poverty. Less than 6% of humanitarian aid in 2014 came in the form of cash as the concern has been that refugees in desperate situation may not spend the money on the right goods and services. In theory aid ensures that this is not the case as aid agencies supply goods and services refugees really need. However aid agencies do not always allocate resources efficiently to those in need as there is either too much of some items or not enough of others.
Furthermore, receiving aid in handouts usually involves standing in queues in public which can be embarrassing and have an effect on social acceptance. Aid in cash gives refugees more autonomy over their spending so that they can participate in the life of the community e.g. pay off debts, contribute to ceremonies and other occasion that are culturally important. Handouts does not allow for this. A UN initiative, found that 70% of Syrian refugees in Iraq had traded handouts from aid agencies for cash, including as much as two-thirds of the rice they received.
A concern over the cash methodology is that the injection of money into an economy will appreciate the currency of the receiving country’s currency which makes exports less competitive and imports cheaper – see previous posts on Dutch disease. This could lead to less growth of export-orientated industries and the injection of cash can also push up the price of basic goods and services leaving some refugees worse off. However giving cash need not lead to Dutch disease for various reasons:
- The number of refugees in most countries is tiny relative to the host population therefore an influx of money is unlikely to have significant effects.
- More cash might increase inflation but contrary to this it may also create jobs and growth in the receiving economy.
- Aid in handouts will distort the domestic economy as it acts as competition and drives down prices for local producers who may not be able to compete.
- Cash is also fair cheaper to distribute – America’s government has estimated that transport and other overheads eat up 65% of spending on emergency food aid. See graphic.
Changes in technology, growing access to financial services, greater urbanisation, and the emergence of government social safety nets are all creating unprecedented opportunities for humanitarian support to reach people in new ways. For example:
During the 2011 famine in Somalia, which killed more than a quarter of a million people, aid agencies used remittance companies to provide cash transfers to more than 1.5 million people, helping them to survive and recover.
In Lebanon, more than a million refugees now use smart card vouchers to buy goods at local shops, or ATM cards to withdraw money instead of receiving in-kind aid.
In the response to Typhoon Haiyan in the Philippines, half a million people received cash through the extension of an existing government social protection programme.
However cash does have its problems when shops are shut.
The Economist – Hard-nosed compassion. Sep 26th 2015 | From the print edition
Centre for Global Development: Doing cash differently. How cash transfers can transform humanitarian aid. September 2015.
To boost spending in any economy you would assume that the central bank would reduce interest rates – encourages borrowing and reduces saving. But very low interest rates could encourage people to hold cash rather than keep the money in the bank – this could slow economic activity in the economy.
Sweden’s central bank – Riksbank – has gone negative with interest rates. Sweden has the third highest savings rate in the developed world but there is a significant positive output gap. With inflation at 0.2% it remains well below the central bank’s 2% target but the mandate from the Swedish government encourages radical measures to rectify the threats of deflation.
But with lower rates in the eurozone to stimulate growth this has weakened the Euro against the Swedish krona making Swedish imports cheaper and putting further deflation pressure on the economy. Therefore the Riksbank has had to cut its own rates in response in an attempt to avoid deep deflation. Switzerland has also go the negative way with a rate of -0.75%.