Validation of the New Zealand GDP model

Following the post on the German real GDP per capita, we revisit the 2008 model for New Zealand. It was also obtained by the trial-and-error method. Empirical constant A and the specific age, Ns, in the defining equation:

g(t) = dlnG(t)/dt  = A/G(t) + 0.5dlnN_s(t)/dt                                            (1)

have been varied in order to fit amplitude and major features of the observed curve. The best fit annual increment value is A=$220 (1990 US$, as published by the Conference Board).  The specific age population in New Zealand is 14 years. The age pyramid enumerated by the 2006 census was extrapolated in the past and in the future in order to estimate the number of 14-year-olds in (1).

Figure 1 presents the observed and predicted GDP growth rates for New Zealand as obtained in 2008. Both curves are characterized by high-amplitude oscillations likely associated with measurement errors. Therefore, in Figure 2 we present both annual curves smoothed with MA(5) and MA(3), respectively. The upper panel in Figure 2 reproduces the 2008 model and the lower one – the 2010 model (one should notice the difference between various vintages of GDP estimates published by the Conference Board). One can conclude that our prediction from 2008 was correct and real GDP per capita in New Zealand actually fell to zero. This is the best validation of our model for NZ and we will continue tracking the fit.

As before, one can expect that  there is no danger of a deep recession in New Zealand, but the rate of real economic growth will be very low (on average ~0.5% per year) in the years to come. 

Figure 1. Observed and predicted growth rate of real GDP per capita in New Zealand between 1980 and 2010.

Figure 2. The observed curve is smoothed with a 5-year moving average. The predicted rate is smoothed with MA(3). The upper panel displays the 2008 model and the lower panel – the 2010 model.  (We present two figures because the GDP estimates vary with data vintage.) One can observe an outstanding accuracy of GDP prediction for 2009 and 2010 (between the smoothed curves).

How long will last real economic growth in Germany

Germany has demonstrated an extraordinary increase in real GDP in 2010: +3.6 per cent.   In the first quarter of 2011, the level of real GDP was 5.2% above that in the first quarter of 2010. This jump is especially desirable after the tremendous fall in 2009: -4.5 per cent relative to 2008. After this strong fluctuation, the question is how strong in the growth trend for the German economy?  One can find a quantitative answer to this question and a long-term prediction of real GDP per capita in Germany up through 2020.

Several months ago we presented log an empirically correct model of real economic growth in Germany. Our concept describing the evolution of real Gross Domestic Product (per capita) is very simple and is based solely on the age structure in a given developed country. Since Germany does not carry out censuses as many countries do, the age pyramid is obtained from administrative record and partial censuses. It makes the final result less accurate and influences our prediction of real GDP in Germany.   

We have empirically and statistically proved that the growth rate, g(t), of real GDP per capita, G(t), is driven by the attained level of real GDP per capita and the change in a specific age population, N_s. According to our model, the asymptotic growth rate of real GDP in developed countries can be completely characterized by constant annual increment A = const. All fluctuations around this constant increment can be explained by the change in the number of people of the country-specific age:

g(t) = dlnG(t)/dt  = A/G(t) + 0.5dlnN_s(t)/dt                                            (1)

Equation (1) is the quantitative model that has been constructed empirically and tested statistically.

We published a preliminary model for Germany severalyears ago; before the 2008/2009 recession. The best fit constant increment is (A=) $260 (1990 US dollars, as published by the Conference Board) and the defining age is eighteen year. The age distribution from 2002 allows a prediction at an 18-year horizon. The original model displayed in the upper panel of Figure 1 suggested a slow-down in 2009 and likely a deeper recession in 2011, with a year of growth in 2010. On average, the beginning of 2010s was characterized by very poor performance of the German economy.

The lower panel in Figure 1 extends the observed curve through 2010. The predicted curve did not change. Overall, we predicted the fall in 2009 and the growth in 2010, with smaller amplitudes, however. This might be the result of severe smoothing of the age pyramid.  (Here, we would like to emphasise again that the prediction of the 2009 slowdown could be easily obtained in 2002, i.e. seven years before it happened!) Figure 2 presents a smoothed version of both curves in Figure 1. Three-year moving averages, MA(3), show a much better fit than the annual curves. Therefore, we do not change our forecast for 2011 and for the future decade. The German economy will not be growing fast. Immigration may induce only extensive growth in real GDP but not in GDP per capita.  

Figure 1. Observed and predicted rate of real GDP growth in Germany after the reunification. The predicted curve is obtained from relationship (1) with A=$260.

 Figure 2. The original curves in Figure 1 smoothed with MA(3).  

Do you really believe that the economic authority can control labor force and unemployment?

Lately, we presented a graph with the rate of participation in labor force, LFP, in the USA. Our task was to show that the change in LFP between 1965 and 2000 induced much bigger variations in labor force than the biggest historical change in unemployment. At the same time, nobody considers the change in LFP as related to real economic growth. Unemployment always takes the front pages and represents a major responsibility of the economic authority. Briefly, when unemployment rate is high the economy likely underperforms.    

Today we would like to discuss a different aspect of Figure 1 which depicts the measured LFP and that predicted from real GDP per capita. (Both variables are borrowed from the Total Economy Database provided by the Conference Board.) Since 1960, the LFP curve has been steadily increasing from 58% to 67% in 2000. After 2001, the curve is characterized by a secular decrease which will likely extend deep into the 2010s. Our quantitative explanation satisfies our understanding of scientific approach. If the reader does not believe in science we would like to ask: 

Do you really believe that the secular oscillation in the measured LFP curve displayed in Figure 1 is somehow controlled by the US economic (and/or political) authority?  

If not, 

Do you believe that the rate of unemployment can be managed by the same authority?

Figure 1. Measured and predicted LFP in the U.S. 

Overall and core CPI in April 2011

The surge in oil and energy price (19% from April 2010) has ignited a fierce discussion on the future of the overall price inflation and the actions needed from the Feds in response to the danger associated with hyperinflation. The FOMC has decided not to change the overnight interest rate in order to help real economy to recover quickly and thus got under severe criticism.  Let’s look at the data on prices and inflation and evaluate the near future of the CPI.

The Bureau of Labor Statistics has published an estimate of consumer price index and its components for April 2011. The rate of headline CPI inflation (year-on-year) jumped to 3.13 percent from 2.70 percent in March, and the rate of core inflation has slightly increased to 1.34% from 1.2% in March. Figure 1 compares these rates from 1985 to 2011. What can we say about the influence of the overall price growth on core inflation, which excludes energy and food prices?  The most important observation is that there is no correlation between the high-amplitude fluctuations in energy/food prices and the core CPI. Even the biggest deviations in 2008 and 2009 have no effect of the trajectory of the rate of core inflation. Moreover, the current gap between the rate of core and headline inflation is by far lower than it was in 1986. Why should the current deviation influence the core CPI? All in all, the Federal Open Market Committee had and has a good reason to believe that oil price will fall in the near future and the curve of overall inflation will cross that of core inflation during 2011 at the level below 2% without any specific actions.  

We still expect that the core CPI inflation will fall below the zero line in 2012 and the headline CPI will rebound from its current higher level below the core CPI manifesting a deflationary period in the US.

Figure 1. The rate of price inflation as defined by the headline and core CPI.

Update. See also a similar post by Paul Krugman

BRICS vs BRIC

South Africa is suggested as a new member of the BRIC with the extension of the abbreviation to BRICS. We have a working model to estimate the SA’s economic performance relative to other BRICS countries. As in the previous post, we calculate the difference between real GDP per capita in the USA and that in South Africa. Figure 1 shows all differences (1990 US dollars at Geary-Khamis PPPs, as published by the Conference Board). Four of the five were already analysed. What can we say about the new member? Honestly, its performance is far from standard, when the difference does not change over time. South Africa underperforms as India and Brazil did during the past 20 years. These BRIC members are really big (in top ten worldwide) what makes their membership justified by the size of economy. It is not valid for SA.

Figure 1. The differences between real GDP per capita in the USA and the BRICS countries

Who is the best performer in the BRIC?

We have a very simple and empirically correct concept of real economic growth based on the finding that annual increment of real GDP per capita is constant in the long run. All developed countries obey this empirical law, at least between 1950 and 2010.

Developing and emerging countries demonstrate various level of performance relative to developed countries. In the previous post we presented Brazil and Russia. These are two representatives of the BRIC. In this post we compare all four countries. Figure 1 depicts the differences between real GDP per capita in the USA and the BRIC countries. A positive slope indicates a poorer when expected performance – the line must be parallel to the x-axis for equivalent performance.

From Figure 1, one can easily decide that India and Brazil were under par (between 1990 and 2010) relative to the standard performance of the USA. China has been growing faster than expected in the 2010s and significantly reduced the gap. Russia had a period of very poor performance in the 1990s as associated with the transition to capitalist economic system. Since 1999, its performance was on a par with China. Obviously, a higher rate of growth in China was related to a lower level of GDP per capita.

Figure 1. The differences between real GDP per capita in the USA and the BRIC countries

Is the Brazilian economy doing well?

There is general opinion that four countries of the BRIC are doing exceptionally well and have been catching up developed countries at a healthy pace. For example, Finn Kydland recently mentioned that some developing countries and emerging economies have been closing the gap in real GDP per capita. Figure 1 presents the difference between real GDP per capita in the US and Brazil. There is no sign that the gap has been closing since 1990. There we two years of countermotion in 2008 and 2009, but in 2010 did not give any further improvement. The Brazilian economy cannot provide the same annual increment of GDP per capita as the US does, and thus, its performance is not good.

Figure 1. The difference of real GDP per capita in the US and Brazil (1990 US dollars). The gap has been increasing since 1990.

Some countries do demonstrate an exceptionally high growth rate, however. Figure 2 presents the case of Trinidad and Tobago. Is that the country of interest for the world-wide economic growth?

Figure 2. The difference of real GDP per capita in the US and Trinidad and Tobago (1990 US dollars).