Introduction to New Zealand’s Economy
New Zealand’s economy has been experiencing some fluctuations, with the June quarter showing a 0.9% drop in GDP. However, Westpac senior economist Michael Gordon has done a comprehensive analysis of the GDP figures, suggesting that the real GDP figure might be a fall of about 0.1%. The discrepancy can be attributed to the closure of the Marsden Point oil refinery and its impact on the statistical method used to calculate GDP.
Understanding GDP Calculations
GDP is not simply the sum of individual parts, but rather a more complex calculation using a method called chain-linking. This involves calculating the percentage change in real output for each industry, assigning weights to each industry based on its share of GDP in nominal terms, and then calculating the weighted-average growth rate. The use of both real and nominal values makes the results differ from a straight add-up of output by industry, resulting in a "balancing item".
The Impact of Marsden Point Oil Refinery Closure
The closure of the Marsden Point oil refinery has had a significant impact on the GDP calculations. The refinery’s output had no seasonal pattern, but its closure meant a slight increase in the average degree of seasonality across the economy. The use of chain-linking amplified this effect, resulting in a more significant seasonal pattern in GDP. This change in seasonality has not been fully captured by the algorithm, leading to a detraction of about 0.5% from reported growth in June quarters.
The Delayed Effect of the Refinery Closure
The closure of the refinery occurred in March 2022, but its effect on GDP calculations was only reflected in the national accounts for the year ended March 2023. This delay, combined with the chain-linking method and seasonal adjustment algorithm, has resulted in the volatility seen in quarterly GDP figures. The seasonal adjustment algorithm, which is based solely on historic data, can take several years to recognize structural changes, leading to a delay in the recognition of the refinery’s closure impact.
Solution to the Problem
To address the issue, Gordon suggests swapping the steps of chain-linking and seasonal adjustment. By doing the seasonal adjustment first and then the chain-linking, the change in industry weights can no longer introduce a new seasonal pattern into the total. This method, combined with identifying industry-specific timing issues, has led to adjusted GDP figures, including a 0.1% drop in the June quarter instead of the initially reported 0.9% drop.
The Real Figures
Using the revised method, the Westpac economists have adjusted the GDP figures, showing a less dramatic loss of momentum in the mid-year. The adjusted figures still point to a disappointing result, with the economy not gaining momentum despite lower interest rates. The downward adjustments to the December and March quarters also show that the economy’s initial recovery was not as convincing as initially thought.
Conclusion
In conclusion, the closure of the Marsden Point oil refinery has had a significant impact on New Zealand’s GDP calculations, leading to volatility in quarterly figures. The use of chain-linking and seasonal adjustment has amplified this effect, resulting in a discrepancy between the reported and actual GDP figures. By revising the method and addressing industry-specific timing issues, a more accurate picture of the economy can be obtained. The truth is that the economy is not doing great, but it didn’t tank in the June quarter either. The aftermath of the refinery closure has messed up the measurement of GDP, but with the revised method, a more accurate understanding of the economy can be achieved.
