An unimpressive MPC

I didn’t expect to be particularly critical of the Reserve Bank after yesterday’s Monetary Policy Statement.  A journalist asked me yesterday morning what I’d say if they didn’t cut the OCR, and I noted to him that whether they cut or not, what I’d really be looking for was evidence of the Bank treating the issues in a serious way, alert to the magnitude of what was going on and the sheer uncertainty the world faces around the coronavirus.

They –  the almost a year old new Monetary Policy Committee –  did poorly on that score.  And in his press conference, I thought the Governor simply seemed out of his depth.  Much of what the Bank had to say might have seemed reasonable two weeks ago –  no doubt when the bulk of their forecasts were brought together – but the situation has been moving (deteriorating) quite rapidly since then.   They can’t update published forecasts by the day, but there was little sign in the record of yesterday’s meeting, or in the Governor’s remarks yesterday afternoon (or those of his senior staff), of anything more immediate or substantive.  The Governor seemed to attempt to cover himself by suggesting that the Bank”s line was consistent with some “whole of government” inter-agency perspective, but….that is (or should be) no cover at all, since Treasury and MBIE don’t face the same immediacy the Bank does (it had to make an OCR decision) and whatever the Ministry of Health might be able to pass along about the virus itself, it knows nothing about economic effects.  On those, the government should be able to look to the Bank for a lead.  Instead, we got something that seemed consistent with the lethargic, lagging, disengaged approach of our government (political and official) to the coronavirus situation.

Thus, remarkably, faced with one of the biggest out-of-the-blue economic disruptions we’ve seen for many years, arising directly and most immediately in one of the world’s two largest economies, we get three-quarters of the way through the press statement before there is any mention of the issue, ploughing our way through upbeat commentary including on the world economy.   Even when we do get there, the coronavirus effects are described only as an “emerging downside risk” –  for something which has already sharply reduced activity in parts of our economy.  It is the sort of language one might use for things where the effects are hard to see, not for something this visible, direct, and immediate.   And on the day when the head of the WHO –  who has often seemed to play defence for the PRC – was highlighting the scale of the global threat.  On a day when a CDC expert was on the wires noting that the only effective response is social distancing –  the more distant people stay the less economic activity there is.

The Bank loves to boast about how transparent it is. As I’ve noted, they are happy to tell us the (largely meaningless) forecasts for the OCR three years hence, but they are astonishingly secretive about their own analysis and deliberations.   Thus, we now get a “summary record” of the final MPC meeting.  Here is pretty much all we get to see about the coronavirus issue

The Committee discussed the initial assumption that the overall economic impact of the coronavirus outbreak in New Zealand will be of a short duration. The members acknowledged that some sectors were being significantly affected. They noted that their understanding of the duration and impact of the outbreak was changing quickly. The Committee discussed the monetary policy implications if the impacts of the outbreak were larger and more persistent than assumed and agreed that monetary policy had time to adjust if needed as more information became available.

….The Committee discussed alternative OCR settings and the various trade-offs involved.

There is no sense of the sort of models members were using to think about the issue and policy responses.  There is no sense of the key arguments for and against immediate action and how and why members agreed or disagreed with each of those points.  There is no sense of how the Bank balances risks, or of what they thought the downsides might have been to immediate action.  There is no effective accountability, and there is no guidance towards the next meeting.  Consistent with that, the document has one –  large meaningless (in the face of extreme uncertainty) – central view on the coronavirus effects, but no alternative scenarios, even though this is a situation best suited to scenario based analysis.   It is, frankly, a travesty of transparency, whether or not you or I happen to agree with the final OCR decision.

Consistent with that, there was no mention –  whether in the minutes or in the body of the document or in any remarks from the Governor –  of past OCR adjustments in the face of out-of-the-blue exogenous events.  Again, perhaps there are good reasons why the cuts in 2001 (after 9/11) or 2011 (after Christchurch) or –  less clearly –  around SARS in 2003 don’t offer good lessons for policy-setting now.  Presumably the MPC thought so, but they lay out no analysis or reasoning, and thus no way to check or contest (or even be convinced by) their thinking.  It really isn’t good enough.   Then again, in the press conference no journalist challenged the Governor on these omissions.

Similarly, there was no sign in any yesterday’s material or comments of having thought hard about the limitations on monetary policy (globally) as interest rates are near their effective lower bound.  All else equal, and with inflation well in check, that starting point should typically make central banks more ready to react early against clear negative demand shocks to do what can be done to minimise the risk of inflation expectations dropping away.  Perhaps again it still wouldn’t have been decisive this time –  and our Reserve Bank still has a little more leeway than many –  but to simply ignore the issue, and show no sign of having thought hard about the wider policy context, was pretty remiss.

From his tone in the press conference, it was as if the Governor really didn’t want monetary policy to have to play a part –  to do his job –  as if it was all just an unfortunate distraction from good news stories he’d been hoping to tell.   So he told one journalist that at best monetary policy would be a “bit player”: for individual sectors that is no doubt true (but then monetary policy is never about dealing with specific sectoral problems), but not really the point, since there has been a clear and significant, highly observable negative demand shocks, and a huge increase in uncertainty (often a theme of RB speeches etc over the last year).  In fact, in answer to another question the Governor was heard claiming that there was “no specific event” to consider reacting to (hundreds of millions of people locked down in China, second-largest economy in the world?) and –  worse –  then claimed that there was no need to act as we already have very low and stimulatory interest rates.  The problem with that argument is that they were just as low six weeks ago, and since then we’ve had a clear large negative demand shock.

Asked about the fact that implied long-term inflation expectations (from the government bond market) were barely above 1 per cent, the Governor took a lesson from politicians and simply refused to answer the direct question.  He then went to on to claim that the monetary policy foot was already on the accelerator, that we’ve had more positive global growth –  even as global projections are in the course of being revised down – and that if anything the question that should have been being asked was why we weren’t thinking about raising the OCR (“renormalising”).

One journalist thought to ask the Governor about the difference between the Bank’s GDP forecasts for the year ahead (2.8 per cent I think I heard) and those of various outside commentators (more like 2.0 per cent) and asked about the difference.  The Governor’s response was that of glib teenager: “0.8 per cent I think”.  Pushed a bit further, he indicated that he had no idea why the difference and (more importantly) no real interest. He claimed (fair enough) not to accountable for anyone else’s forecasts, but showed no interest in the cross-check (that used to be pretty standard around the MPC table) of understanding why the Bank is different from others, and why the Bank still thinks that is the best forecast.

There was also the line about market prices constantly adjusting and buffering……all this as the exchange rate rose the best part of 1 per cent on his announcement yesterday, rather undercutting any exchange rate buffering  of the economy that had been underway.

Oh, and then we had gung-ho political cheerleading for the government’s infrastructure spending plans.  He claimed to be “very excited” by it and rushing past any issues around “crowding out” was keen to talk up all the possibilities of “crowding in” accompanying new private sector investment etc.  No evidence, no analysis, but it probably went down well with the Labour Party.  Sadly, the Governor seems to do campaigning and cheerleading better than he does monetary policy, and there seems to be no serious and substantial figure on his team to compensate for those weaknesses (while, as far we can tell, the invisible unheard external MPC members just function as ciphers and political cover).

As an illustration of what the Bank simply seemed to be missing –  or choosing to ignore – a reader left this comment here last night

The shock from nCoV isn’t just confined to China. It’s spilling rapidly across the Asia-Pacific region…

I have just spent the past few days in Singapore and I write this on a flight to Hong Kong, which is maybe 15% occupied. Singapore is shutting down, which is worrying given its entrepôt status. Malls are emptying, as are hotels and restaurants. Traffic is thin. Companies are rolling out their business continuity plans which will further exacerbate the dislocation. This isn’t about just China, it’s region-wide.

The same reader sent me directly a photo of one of Changi airport’s main terminals at lunchtime yesterday, with this note “Changi T-3 unloading zone. Today, 12 noon. Not a soul in sight.. no cars no people..”

I noted yesterday that more or more people would be cancelling trips, business or leisure, in the face of some mix of risk aversion and sheer uncertainty.  That happened to me yesterday –  less about immediate threat than about the extreme uncertainty about the environment a few weeks hence.

And this morning we hear a local public health expert calling for our sluggish government to expand travel restrictions to people coming from various other countries (including Singapore and Hong Kong) where there is now established community outbreak. Or news of major international events in Hong Kong being cancelled. Or a major world telecoms convention in Barcelona being cancelled.

I’m not suggesting the Reserve Bank should have tried to turn itself into disease experts or even to pin their colours to a different central scenario.  But they simply don’t seem alert to the magnitude of what is already going on, including that huge rise in uncertainty, and they provided us with very little useful analysis about the way they think about monetary policy, demand shocks, risks, instrument stability etc –  nothing to give us any confidence in their stewardship.

Oh, and you’ll recall I mentioned yesterday their interesting –  and potentially positive – experiment in transparency, inviting real-time questions to the Governor during the press conference via Twitter.  As I’d noted in advance, one might well be sceptical about just which questions they would choose to answer.  Actuals were even worse than my expectations.  The Bank’s comms guy had clearly been primed not to expose the Governor to any searching questions, and only two were let through at all, essentially translated into patsy questions, allowing the Governor to wax eloquent on a couple of favoured themes.   No one forced them to adopt this particular approach to being more open.  But if they want kudos for it, they need to be seriously willing to allow real and searching questions to the Governor.




Coronavirus and the OCR

A month ago there were no commentators suggesting the OCR should be raised at the next review.   Since then we’ve watched day-by-day as the news about the coronavirus (now named “SARS-CoV-2” and the disease it causes “COVID-19.”) has got relentlessly worse.   Against that backdrop, the case for an OCR cut today looks pretty unanswerable. Not because an OCR cut will make any material difference to March quarter GDP – it won’t –  but because the job of discretionary monetary policy is to lean against demand shocks, positive or negative, so long as inflation is well in check.

As I noted the other day, core inflation hasn’t got as high as the target midpoint for the whole of the last decade.  In that context, when there is a clear-cut (if not readily calculable) adverse demand shock, the Monetary Policy Committee would be remiss if it simply sat on the sidelines today, suggesting that they would merely be “watching closely” and be ready to act down the track.  In the current macro climate –  quiescent inflation, flat or falling inflation expectations –  there is simply no downside to acting now.    There is no particular virtue in instrument stability: the instrument exists to lean against macroeconomic instability (doing what it can to maintain “maximum sustainable employment”, in the current jargon).

Even a couple of weeks ago one might perhaps reasonably have reached a different view.  But now we have Chinese inbound tourism cut to almost nothing overnight (first as a result of Chinese restrictions and then our own), and confirmation from the universities that perhaps 60 per cent of their PRC students are still out of the country and unable to travel here.    We have much the same situation in Australia, a key economy for us, and in China itself –  one of the world’s largest economies –  huge economic disruption, and a spreading range of restrictions on movement, social gathering etc etc.  We see photos of largely empty streets or public transports in big Chinese cities that aren’t locked down, quite limited returns to work after earlier shutdowns, and so on. From Hong Kong there are reports of more cases, but again the bigger impact is probably people staying home, avoiding social gatherings etc.  Investment banks doing business in China –  ie quite severely constrained in their freedom to run negative lines –  have been marking down their 2020 Chinese and global economic forecasts.  Even the WHO –  which previously presented as relatively complacent – is now talking of this as

WHO chief Tedros Adhanom Ghebreyesus told reporters in Geneva the vaccine lag meant “we have to do everything today using available weapons” and said the epidemic posed a “very grave threat”.

“To be honest, a virus is more powerful in creating political, economic and social upheaval than any terrorist attack,” Dr Ghebreyesus said.

“A virus can have more powerful consequences than any terrorist action.

I’ll leave the florid rhetoric to him, but if there was a good case for cutting the OCR after the 9/11 attacks and after the February 2011 earthquake (and I think there was) that case is at least as persuasive –  compelling in my view –  now.

It isn’t really clear to me why, faced with a decision to make today (not, say, a week ago as with the RBA), anyone would favour not cutting the OCR.   The OCR (monetary policy more generally) is designed to be flexible and responsive (easing and, if warranted later, reversing such easing).  The OCR isn’t about support for individual adversely affected sectors –  if that is really needed in some areas it is a fiscal policy/government matter –  but about stabilising the overall economy faced with (in this case) clear negative shocks.  The tool is fit for purpose.

One argument sometimes heard is that we shouldn’t do anything because things are so uncertain.  But that argument should run exactly the other way round. The high degree of uncertainty, which is probably now rising by the day, is exactly the conditions in which people put off spending, put off travel, are a bit warier about eating out, and so on. It represents a likely material adverse demand effect on top of the specific channels (tourists, students) we already knew about.  Think of travel.  You might have been planning a business trip into Asia.  You might be happy enough to go today, and yet you look ahead and wonder what things might be like when you want to get home again, let alone what conditions might be like if somehow you got sick.  I reckon we’ll see an increasingly number of non-essential trips postponed, whether business or leisure.  And that won’t be so just in New Zealand.   With each passing week, we’ll also see more spillover effects into spending elsewhere in the economy and the confidence surveys –  whatever we make of them –  are likely to take a hit.

There is also the argument that things will snap back once the virus is behind us.  No doubt that is the most sensible assumption, but an increasing number of commentaries are noting that a full snap back isn’t likely to be a matter of a few weeks: it seems increasingly likely that the level of economic activity over much of this year, in much of the world, will be weaker than otherwise –  perhaps not a lot by the end of the year, but that is still 10-11 months away.    And assuming things will simply snap back risks being a recipe for doing nothing with monetary policy when it was actually needed (there are plenty of things forecasters think will be shortlived, but turn out to drag on rather longer).

I’ve also heard a story that the Reserve Bank cutting the OCR by 50 basis points last August may have instilled in some a sense of unjustified worry, becoming a bit of an own goal. Is there a risk of something similar now?    First, the August cut wasn’t well-handled.  It may have been substantively justified, but was poorly communicated and was not clearly tied to specific and very visible adverse developments here and abroad.  As it happens, I don’t think the “own goal” effects, if they existed at all, lasted for long at all (little sustained evidence in eg confidence surveys).    What about a move now?  Sure it would be unexpected, in that surveys of economists were all picking no change.  But (a) those surveys were often done a week or more ago, (b) economists generally aren’t asked what they think the Bank should do, and (c) there is a very clearly identified adverse event, which every commentator will be focusing on.  It would be quite easy for the Bank to credibly justify a cut today, specifically tagged to the coronavirus (and referring to 9/11 and 2011).  And if in doing so the Bank raised a bit more public consciousness of the mounting economic issues, it would probably be no bad thing anyway.

Perhaps the final caveat I’ve seen is that global equity markets seem quite surprisingly sanguine.  If they aren’t pricing something quite bad –  or even high risk – why should central banks react?  It is a fair question.  One answer is a matter of different time-horizons.  Equity markets are pricing earnings prospects over the life of the firm, while central banks are (by design) supposed to be focused more on the short-term.  A few bad months might not rationally affect the value of most firms much, but might still warrant lower policy interest rates. It is just a different game.  But it is also worth noting that New Zealand markets are pricing an OCR cut by the end of this year.   If it is needed, and likely to be useful, in a coronavirus context, it is much more useful –  and more likely –  frontloaded.

Time (not long now) will tell what the Monetary Policy Committee decides to do.  I am encouraged by two things: first, was the MPC’s willingness to act decisively last August (even if the accompanying communications etc were hamfisted) on much less clear-cut evidence, and second by the fact that one of the external members of the MPC (retired economics professor, Bob Buckle) was heavily involved in The Treasury’s early work on pandemic economic effects last decade.

Whatever the MPC chooses to do, the Reserve Bank has introduced an interesting new exercise in transparency.  If you are on Twitter you can ask the Bank directly a question during the press conference this afternoon.

The OCR should be cut

The Reserve Bank Monetary Policy Committee releases its next Monetary Policy Statement and Official Cash Rate (OCR) decision next Wednesday –  the first we’ve heard from them since November.

Until a couple of weeks ago you could probably mount a pretty strong case for the status quo. If the MPC was right to have left the OCR unchanged at 1 per cent in November,  it probably looked as if that was still going to be the right decision in February.  I thought they should have cut in November, and so was still inclined to think they should cut now –  but it wasn’t a particularly strongly held view.  It is worth remembering that after all these years, the Bank’s favoured core inflation measure still isn’t back to 2 per cent (it was last there in 2009) and there wasn’t a lot in the wind suggesting it was likely to rise further.   But there hadn’t looked to be a lot in it.

The Reserve Bank’s Survey of Expectations, released at 3pm today, looks to be not-inconsistent with that sort of status quo story.  But the survey closed a week ago, and opened two weeks ago –  the Bank doesn’t tell us when responses came in, but I know I completed mine on 25 January.

Since then coronavirus has become a huge story.  From an economic perspective, the issue isn’t so much the number of deaths –  50 or so in total two weeks ago and 640 now, on official figures –  as the policy and personal responses, here (and in other similar countries) and in China.    Two weeks ago, perhaps optimists might have hoped a one week shutdown over Lunar New Year might break the back of the problem.  But then, of course, ever more cities in China were locked down, the PRC authorities banned most outbound tourism, countries starting putting restrictions on arrivals of non-citizens who’d been in the PRC, and finally New Zealand –  apparently dragged along by Australia –  banned the arrivals of anyone other than citizens (and their close family members) who’d been in China recently.  We’ve also seen dairy product prices falling, talking of serious disruption in the logging industry, and so on.   We’ve even seen some more-domestic effects, including the cancellation of the Lantern Festival in Auckland.  Oh, and there seems to be no sign in the PRC responses that suggests they think they’ve already got on top of the problem.

No one knows how long these effects will last, or whether things may yet get (perhaps materially) worse from here (I was talking to a journalist the other day about possible extreme scenarios, and it doesn’t really do to contemplate what would happen to world trade –  perhaps only for a short period – in such scenarios).

When I say ‘no one”, that of course includes the Monetary Policy Committee, who will have not a shred more information on the underlying situation –  and probably very little more on domestic economic effects – than you, I, or anyone else.   Any data available just yet –  perhaps daily air arrivals, or electronic transactions volumes in (say) Queenstown –  will be fragmentary at best, and there won’t even be new local business survey data for a few weeks.  So they have to work with what we know, perhaps how things would be likely to play out if the policy responses (here and abroad) remain much as they are for any length of time, and within a framework for thinking about risk and regret.

All of which looks a lot like the classic sort of shock monetary policy is designed to help manage (lean against).  Aggregate demand in New Zealand will take a not-insignificant hit: tourism and export education from the PRC is about 1 per cent of GDP, and tourist numbers will dry up almost completely for now, and (if our numbers are similar to those in Australia) the export education numbers are likely to more than halve.

These effects might not last long, but they are the situation we face now and no one has any idea how long the adverse effect will last.

But these aren’t the only demand effects.   Australia and the PRC are our two largest overall export markets: economic activity in China is likely to have taken a substantial hit this quarter, and Australian universities are (for example) even more dependent on the PRC student market than the New Zealand ones are.

And how would you respond to uncertainty if you were in business, or were (for example) a lending institution.  The rational response is to put projects on hold where possible.  That seems likely to happen –  perhaps on a very small scale initially (few new projects start each week, but mounting as the situation becomes more protracted (and perhaps doubts grow about just how quickly business might rebound).

Also, although the focus to date has been on services exports (tourism and export education), and a couple of goods export sectors, even if goods can be still shipped out to China, you have wonder how soon the flow of imports is going to be affected –  people who’ve been in China in the last 14 days can’t enter Singapore, Australia, PNG, Fiji, Taiwan or…..New Zealand (and, I understand it, much of New Zealand’s trade is trans-shipped through Australia or Singapore).  Ships need sailors.

I don’t know what the Reserve Bank will have chosen to do about their formal economic forecasts.  In their shoes, I’d probably publish ex-coronavirus forecasts, and then a series of scenarios around coronavirus effects (what else can they do: they usually treat other policies as a given, and in this case the ban of people who’ve visited the PRC is scheduled to lift next Sunday, but I doubt anyone much expects it will be, and more importantly neither they nor anyone else can credibly forecast the path of the virus, including how its is beginning to spread outside China).

But whatever they do in the body of the document is much less important than the policy call they make.     This is the time to cut the OCR. perhaps even by 50 basis points.  It would be a mix of risk-mitigation and responding to a real loss of demand (very rarely do we see such hard early evidence of a specific source of demand drying up so quickly).

The standard counter-argument is something along the lines of “early days”, “likely to rebound quite quickly –  eventually”, and so on.  But here is the thing about monetary policy: it can be adjusted quickly (to cut and to raise); it is the tool designed for short-term macro-stabilisation (unlike fiscal policy) and some of the channels –  notably those to the exchange rate –  work really quite quickly.  I’m not suggesting that cutting the OCR would make more than a trivial difference to GDP in the March quarter (the tourists and students still won’t have come), but if the effects are any longer-lasting we would start to see the benefits.

Twice before the Reserve Bank has cut the OCR is response to truly-exogenous external events.  The first was the unscheduled 50 basis point cut in September 2001 (a week or so after the terrorist attacks).  Here was the case we made then

“It seems more likely now that the current slowdown in the world economy will worsen. In these circumstances, New Zealand’s short-term economic outlook would be adversely affected, although any downturn might well be relatively short-lived.
“New Zealand business and consumer confidence will be hurt by recent international and domestic developments, and today’s move is a precaution in a period of heightened uncertainty.

I still reckon that was an appropriate response at the time, even though we had (a) no new survey or hard data, (b) there were no foreign or domestic government restrictions which would have the direct effect of biting into domestic demand in New Zealand and (c) the exchange rate –  already low –  was by this point almost 5 per cent lower than it had been on 11 September.  It was explicitly precautionary, but in a climate where our best judgement told us that if there was any effect it was going to be adverse (disinflationary).

The second such 50 point cut was in March 2011, after the severe February earthquake.    As the Governor put it at the time

“The earthquake has caused substantial damage to property and buildings, and immense disruption to business activity. While it is difficult to know exactly how large or long-lasting these effects will be, it is clear that economic activity, most certainly in Christchurch but also nationwide, will be negatively impacted. Business and consumer confidence has almost certainly deteriorated.

Going on to observe

We expect that the current monetary policy accommodation will need to be removed once the rebuilding phase materialises. This will take some time. For now we have acted pre-emptively in reducing the OCR to lessen the economic impact of the earthquake and guard against the risk of this impact becoming especially severe.”

We knew that the longer-term impact of the earthquake would be a big positive boost to demand (all that rebuilding activity, which would crowd out other activity in time) but still concluded that it was appropriate to cut early and quite hard to lean against adverse confidence effects etc (and some direct adverse demand effects –  eg to South Island tourism).    Perhaps we just got lucky, but it still looks like an appropriate response to me, even with years of hindsight.

In June 2003, SARS also played a role in the Bank’s decision to cut the OCR then.  I wasn’t involved in that decision –  I was working overseas –  so don’t have as strong a sense of the balance of factors.  One can mount an argument that it was unnecessary to have cut  –  the Governor eventually concluded as much –  but much of that argument was with the benefit of a hindsight that real-time decisionmakers could not have had (about how quickly the virus would be contained).

Set against the backdrop of those three cuts, I reckon the case for an OCR cut now –  even it had to be pullled back in six months’ time –  is stronger than in any of those other cases.  We have clear adverse domestic demand effects, that aren’t just about confidence but about policy choices in China and in New Zealand (and, more peripherally, in other countries), we don’t just have a one-day event which we live with the aftermath of (rather an ongoing situation, which is probably still worsening), the epicentre of the issue is in the world’s largest or second-largest economy which itself is taking a large negative economic hit for now, and Australia –   our other main trading partner, and major source of investment –  faces very similar issues to New Zealand.

Against that backdrop, it isn’t obvious what the downside would be to an OCR cut next week.  Core inflation is still below the target midpoint, and yet the demand shock is adverse.  Perhaps things resolve themselves very quickly in a couple of months and the Bank is slow to pull back the OCR cut.  The worst that could happen then might be core inflation going a bit above 2 per cent.  But since 2 per cent isn’t supposed to be a ceiling, and we’ve haven’t even been to 2 per cent in the last decade, that might count as a gain not a loss, in terms of supporting core medium-term inflation expectations.

Then, of course, think about really bad scenarios, and a world with very limited fiscal and monetary policy capacity to respond to a serious downturn. It really is important to keep those expectations up.  Recall that that was one of the stories the Reserve Bank told for a while after the unexpected 50 basis point cut last August.

But here is the implied inflation expectation measure from market prices, right up to today (the difference between yields on nominal and indexed 10 year government bonds)

IIB jan 2020

There was a bit of lift in this measure of implied expectations late last year (partly global, but a range of central banks were responding similarly).  But now we are pretty much back to where we were before the Bank cut the OCR unexpectedly sharply six months ago (and this even after bond yields have bounced off their lows earlier this week).   I guess we should take some comfort that implied expectations aren’t lower than those in August, but 0.98 per cent is a long way from 2.

And as one last straw in the wind, in 2017 the Bank (helpfully) added a couple of questions asking about respondents expectations for inflation five and ten years hence.  The answers have hewed pretty close to 2 per cent –  I usually put in 2 per cent for 10 years hence, noting that the current MPC/government won’t have any effect on those outcomes –  but when I opened the survey results today I noticed that even these expectations (which the Bank likes to boast of, as a sign of confidence) have been edging down.

long-term expecs

The differences are small, and in isolation I wouldn’t put much weight on them.  But not much is moving in the right direction, and these results were surveyed two weeks ago when most respondents thought the policy status quo was just fine for now.

It seems a pretty obvious call to me that they should cut on Wedneday –  absent some startling positive turn in the virus and related news between now and Wednesday morning –  rather than just idly handwringing about “watching and waiting”.  And the Governor/MPC was willing to make some big and unexpected calls (wisely or not) last year.    The Bank wouldn’t be the first central bank to move either.

Who knows whether or not the Bank will actually move on Wednesday – quite possibly not even them yet – but I’m sure the MPC will have been looking for some analysis of past responses to out-of-the-blue shocks and thinking about the similarities and differences here.    Whichever path they finally choose, that thinking should be laid out – not just noted – in the MPS and/or the minutes.





Flu and coronavirus thoughts

Ten days or so, prompted by the news emerging from China, I’d gone and found the pile of books I’d accumulated –  and in many cases not read –  over the years on pandemics, plague etc etc.  Since then I’ve read three of them, including two on the 1918 flu pandemic.

The first, published in the 1970s, was Richard Collier’s  The Plague of the Spanish Lady, a week by week treatment, drawn from some mix of contemporary accounts and survivors’ memories, of the experience with the flu pandemic (which got associated with Spain, mostly because Spain wasn’t at war and so there wasn’t the press censorship there was in many other countries).  It isn’t a global perspective, but he captures accounts from across the Anglo countries and northern Europe –  with quite a surprising number of snippets from New Zealand (the author apparently got a good response here when he advertised for survivors’ memories).   It isn’t an analytical treatment by any means –  there are various other good books for that –  but it was an absorbing impressionistic read.

Someone asked me the other day whether it was “scary”, and I guess in a way it was.  But I was more struck by the complex mix of responses, individual and institutional.  At the official level, often a reluctance to disrupt the ordinary course of business, life etc –  all compounded by the fact that there was still a war on.  It is always difficult to tell whether, in its early stages, something will turn really serious, and to judge best which risks to run.  But if those sorts of errors were pardonable, others were almost inexcusable –  the French Governor of Tahiti, and the New Zealand Administrator in western Samoa being just two prominent examples.  There are stories of sheer horror –  an Eskimo village in northern Canada where many human victims were finished off, and dead human bodies eaten, by ravenous dogs that no one was well enough to feed –  but also those of immense personal sacrifice, of people –  professional and otherwise –  rising to the occasion in ways they themselves might never had imagined, and so on.     And there was the sheer number of deaths in a matter of weeks – New Zealand lost half as many to the flu in little more than a month than we’d lost in four years of World War One.     Western Samoa is estimated to have lost 22 per cent of its population (while American Samoa lost no one).

The second was Prof Geoffrey Rice’s Black November: The 1918 influenza pandemic in New Zealand.  I was reading the 2005 version, but there is a new, and shorter, version still in print.   Rice –  an academic historian –  records that he had known nothing of the pandemic until he had an after-dinner conversation in 1977 with his father, who’d been a child in Taumaranui in 1918 and whose grandmother had been the final death in that unusually severely-affected town (if I recall rightly, around 80 per cent of Taumaranui’s population had come down with the flu and almost 2 per cent of the population had died (the national death rate was under 1 per cent).    That conversation sparked Rice’s interest, and a sustained research project, culminating in a first edition of his book in 1988.

The more formal side of the book was built on a reassessment of the death toll, based n a careful examination of all New Zealand death certificates during the period of the flu  (the advantage of a small population).   The book includes the detailed data by suburb (and town/county) –   18, or just under 0.5 per cent, in Island Bay for example.  And the data is there too (and a whole chapter of the text) for the staggeringly bad Maori death rate (4.2 per cent of the population died), although as Rice notes even in other years the Maori flu death rate far exceeded that for the European population up to at least the 1930s.

A significant chunk of the text is three chapters on each of the Auckland, Wellington, and Christchurch/Dunedin experiences –  city death rates (especially Auckland and Wellington) were consistently above those in the rest of the country – but there is a selection of detailed small-town accounts too (more than I’d ever previously read on Temuka).  The book is liberally illustrated –  photos, charts, and various survivors’ accounts (Collier providing his full New Zealand material) – and a nice mix of the more-analytical and the impressionistic/anecdotal.   I’d strongly recommend it to anyone interested in the period.    There is much the same mix of impressions –  positive and negative- as in the Collier book, but with more space and a single country, more depth and insight.

There was the New Zealand Ministry of Health with a grand total of about 11 staff.  A Minister of Health –  George Russell –  who was initially sceptical but then energetic, hard-driving, and pretty effective, even as he got offside with numerous local authorities.  There was the heavy community engagement in many places –  including an important role played by, for example, Boy Scouts in delivering messages, meals etc –  but Rice highlights the difficulty local organisers had in finding enough volunteers to help in Wellington (life still going on, the mayor had lamented seeing various young and fit people playing tennis one weekend, even as the pandemic raged).  There were doctors who gave everything and others who wanted only to tend their own patients.  There was the extreme – but shortlived – commercial disruption, even a week-long “bank holiday” (for all banks other than the Post Office, which apparently attracted more deposits that week).   There was the university exams suspended –  it was November –  after one student died while sitting his exam (the Chanceller of Victoria, former Prime Minister Sir Robert Stout, was outraged at the Minister of Health interfering in the internal affairs of the university).  The residents at Te Araroa who, collectively, got out their shotguns to prevent (anyone who might carry the) disease entering their settlement. And the deaths, so many deaths.  And the funerals –  elaborate funerals and funeral processions being a more important element in society then.   And perhaps in a testimony to some bits of government working better and faster then, the epidemic had only run its course in New Zealand by mid-December 1918, but the Epidemic (Royal) Commission’s report was presented to Parliament on 13 May 1919.

(Oh, and for those marvelling at China’s ability to build a new hospital in a week, I even noticed a couple of references in Rice’s book to small New Zealand towns  – with limited people and technology –  building new hospital wings in a matter of days.)

That’s enough history for now.

Ten days or so ago I also wrote a post, almost entirely hypothetical at time, about pandemics and potential economic effects when/if there ever were a serious one again.  Much of it had just drawn on thinking I’d been part of back in the 00s when there was a major official government effort to prepare against the risk of pandemic (H5N1 being around at the time).  But as I noted then –  it was the standard view in that earlier planning exercise

….in a modern economy a serious pandemic could have major economic consequences, less because of the loss of life itself (although the loss of 1 per cent of the population would, all else equal, lower potential GDP semi-permanently by around 1 per cent) than because of the disruption, the fear, and the voluntary or semi-compulsory social distancing that would be put in place to try to minimise the risk of the virus spreading or of particular individuals contracting it.  In a quarter in which an outbreak was concentrated, it is quite conceivable that GDP could fall by as much as 20 per cent  (if every worker was off work for just a week –  whether sick themselves or caring for others –  and that was the only adverse effect –  it wouldn’t be –  that alone would be a loss of almost 8 per cent).   Even if the outbreak was quite concentrated in time and normal economic activity resumed in full very quickly, in such a scenario GDP in the year of the outbreak would be 5 per cent less than otherwise.

Ten days on, that must be a lot like what is going on in Wuhan – and, it seems, an increasing number of Chinese cities.  Read the stories, watch the video footage etc and it is hard not to suppose that GDP in these parts of China will not be very very sharply lower in the first quarter (whatever the official statistics eventually say).  And all that with “only” 17000 offically confirmed cases –  that is a lot of people in absolute terms, but a tiny share of the population relative to (say) 1918 or those earlier pandemic planning scenarios.  There are doubts among some experts as to whether the PRC numbers are being properly collected/reported, but whether that is so or not, the economic effects (in large chunks of one of the world’s biggest economies) are already looking real and substantial.

And that is just China.   What about here, where there has not yet been a confirmed case?  We already had some direct effects last week (on the small scale, crayfish exporters and on the much larger scale, the PRC authorities themselves banning any outbound tourism (booked through official agencies, but we are told that is most of it)).   And non-trivial numbers of people wouldn’t have been able to travel anyway because they were locked down in their own cities or even neighourhoods in China).     But now we have joined a range of other countries in banning entry to non-citizens who had been in China in the last 14 days.  Probably the Chinese students coming for secondary school were mostly already here –  the treasurers of the respective boards of trustees will be grateful for that –  but the university year is still several weeks away and there are normally lots of PRC students (new ones, and ones returning after the long break).  For the time being none will be arriving.

Despite the idle government talk –  unquestioningly repeated by most of our media –  there seems very little chance that this ban will be only for 14 days.  It wouldn’t take that long presumably before, even if the ban was lifted, it wasn’t worth coming for the rest of the first semester.  There is a lot of revenue at stake for most of universities (and plenty of other tertiary institutions).  Tourism and export education receipts from the PRC alone make up 1 per cent of our economy –  direct effects only.   Once this is all over it would be interesting to launch a series of OIAs to discover how much education sector lobbying of the government was going on last week –  “never mind about public health risks, think about our bottom line”, and if you think that is excessively cynical, recall that this is basically the approach our universities take to the PRC more generally (“don’t expect us to be critic and conscience, there are joint ventures to be done, revenues to raise”).

(As it happens, this episode looks like an interesting quasi case study on PRC issues more generally.  In writing about the appalling way our political classes pander to the PRC, I have pointed out that export education and tourism are the two sectors that are most vulnerable –  commodities are sold in a global market.  One could envisage the PRC “punishing” New Zealand if it ever chose to speak out and push back more seriously –  has happened to other countries – but probably the most severe scenarios wouldn’t have envisaged PRC tourism and export education revenues being shut off almost completely overnight.  These will not be trivial effects, but I’ve argued that we could expect exchange rate adjustment and monetary and fiscal policy offsets, and that in the event of any such “punishment” it would not in any sense be catastrophic for the New Zealand economy, tough as it might be for individual over-exposed firms.  Time will tell how this particular unfortunate “experiment” plays out.)

It is very hard (for anyone) to know what the right policy response for countries like ours (or the numerous others that have imposed similar restrictions) might be.    You could mount a fairly good case, I’d have thought, for putting in place these sorts of restrictions a week ago –  after all, the Chinese authorities are the ones with the only real and hard information and they’ve imposed unprecedented lockdowns and stopped their citizen tourists going abroad (the latter arguably a very public-spirited approach to the rest of the world).   The revealed preference signals were pretty strong, and have only got stronger as the week has gone on.  You might also be troubled –  as I’ve been –  by the small number of cases the PRC is reporting completed and discharged.    The WHO might not approve of restrictions –  appears still not to –  but the WHO is responsible to no citizens or voters.  But our government was almost entirely silent all week –  nothing at all from the PM, little or nothing from the Minister of Health and mostly sunny upbeat stuff from the Director-General of Health and his staff.   They seemed to think this wasn’t a matter they needed to engage seriously on, and the media seemed to not pursue the issue in any meaningful way.

There were telling comments in an (otherwise strange) interview on Radio New Zealand this morning with the PRC Consul-General in Auckland.    Having taken the lead in banning its own people from heading abroad as tourists, the PRC now appears to have got grumpy at countries imposing their own restrictions.  The Foreign Minister has been quoted criticising the US restrictions.  And here is the Consul-General (and recall this is an agent of a highly authoritarian state, he won’t going off-message or talking out of school).

The Chinese people are now isolating the coronavirus, but New Zealand is … joining efforts to isolate the Chinese economy. That’s why I feel very disappointed.

“I think the epidemic will certainly have a impact on the business between the two countries. China is New Zealand’s largest trading partner … as I said before trade should be based on a normal exchange on people. But this sudden travel ban will worsen the current situation. If Chinese economy suffers from international isolation, the New Zealand economy will also be in a loss.”

No one here is trying to “isolate the Chinese economy”: rather our authorities are simply doing what the PRC had already been doing.  You and I are free to buy stuff from China: the big question this week is how many Chinese factories or offices will be actually at work.  If China is suffering, it is from a virus that got started in China (and which was covered up initially be the Chinese authorities).

But my real interest was in the Consul-General’s comment on the New Zealand government

“I can tell you that only two days ago, our foreign ministers talked over the phone about the outbreak… Foreign Minister Winston Peters said that New Zealand will maintain normal exchanges and people’s flow between the two countries. However, just overnight, the New Zealand changed its mind.

Now that is very interesting. It suggests that as recently as Friday or Saturday our deputy prime minister –  presumably reflecting whole of government policy – was telling the Chinese Foreign Minister that we would be imposing no travel restrictions.  I suppose the PRC could have got the wrong end of the stick, or be misrepresenting the conversation, but someone should surely be asking Winston Peters some hard questions about just what went on the inner counsels of our government (all this apparently without a Cabinet meeting).

Because suddenly yesterday afternoon we were imposing travel restrictions, much the same of those imposed by various other countries –  against WHO preferences apparently – a day earlier.  The notable late movers were the United States and Australia.

One has to wonder what the New Zealand government learned in the 24 hours prior to yesterday afternoon that led to such an (apparently) sharp change of stance.    I wonder whether pressure was put on them by the Australian government?  One could imagine the Australians thinking “well, if we put on restrictions and New Zealand doesn’t, the virus could get established there, and with incubation periods etc that would allow backdoor entry to Australia. “Nice visa-free entry to our country you have there: shame if something got in the way of it” might have been the message, express or implied.  Perhaps someone might ask our government, or Australia’s.

(Having imposed the restrictions, I presume the government is now thinking hard about what criteria it would use in deciding whether to extend the ban to people who’ve been in other places.    Will 100 human-to-human cases in Australia, or Hong Kong, or the US, or the Philippines, be enough for a ban on people having visited those countries. If not 100, then how many?  I don’t know the answer, but I hope the government has one in mind.)

And an almost-final thought for now, I’ve been staggered at how poor the New Zealand media coverage of these issues –  as they directly involve New Zealand policy choices –  has been.  It is easy to run foreign stories on events in China, but what we also need is seriously reporting and scrutiny of choices made, risks run (or averted here).  Last week, our media seemed simply engaged in channelling Ministry of Health lines, and a few personal stories.  In today’s media there still isn’t much sign that anyone has done any digging, talked to inside sources etc, to understand the dynamics of government decisionmaking.  And there is hardly any mention –  I saw one very brief snippet in the Herald – of the economics of the tertiary education sector, no attempt to talk to vice-chancellors, no attempt to talk to other commentators.  (Not even any apparent attempt to talk to the China Council, who must be torn –  when David Clark says the Chinese authorities were relaxed about NZ government choices, and the Consul-General says the opposite).   And there has been no serious challenge or discussion on the “14 day ban” –  which seems to risk giving quite misleading signals to people in relevant industries, against a global backdrop where unease is increasing, not showing any sign of relief).

And a final purely anecdotal point.  I was staggered over the weekend to hear of two teenagers, one of whom was reluctant to go into central Wellington over the week for fear of being exposed to coronavirus, and another whose parents forbade her to go.  And then this morning I was in the supermarket and noticed a customer in front of me (as European-looking as me) coughing her way down the aisle, not covering her mouth at all.  I suspect at another time I wouldn’t even have noticed, and yet I was brought up short –  not because I have any unease at all about being out and about anywhere in New Zealand, but in realising what the recent news had made me take notice of.   One has to wonder how much self-initiated social distancing will start going on here.  It doesn’t take much – rational or not – to put a dent in entertainment etc spends.