Meanwhile, banks in New Zealand made record before-tax profits of $8.83 billion in 2022, which is not a bad thing, as we do want our banks to be profitable (when banks collapse, economies struggle). Yet, calls for a Commerce Commission inquiry are being heard, not because their return on equity seems high (the opposite is true) but because their returns are much higher than other banks worldwide.
In the same week, Statistics New Zealand released the GDP and unemployment figures for the December 2022 quarter. Many economists expected economic growth to slow down but hoped the growth rate would still be positive, maybe around the 0.3% mark. Well, it is a surprising -0.6%.
So, what’s the more pressing issue – the New Zealand banking sector and the ripples of a potential banking crisis reaching New Zealand’s shores or a negative quarterly GDP growth rate and the impact on unemployment?
New Zealand banks are in a strong and healthy position, thus, it is rather unlikely that the banking situation in the US and Switzerland will affect us. So, let’s talk about GDP and unemployment.
The September quarter was strong with a quarterly growth rate of 1.7%, but a considerable decline of production across all industries combined with lower-than-expected consumer spending, especially around Christmas time, and a drop in investments have brought our economic momentum to a halt.
Unemployment increased slightly from 3.3% to 3.4%, which is still low compared with 4.9% two years ago, but the highest for a year, nevertheless.
Intuitively, a negative relationship between GDP and unemployment exists. If GDP falls, less is produced, so we expect the unemployment rate to rise, and if unemployment falls, then more should be produced.
Okun’s Law
In the 1960s, Yale professor and economist Arthur Okun, also a member of US President John Kennedy’s Council of Economic Advisers, empirically investigated the relationship between unemployment and losses in a country’s production. His original findings, known as Okun’s Law, were that unemployment would rise by one percentage point for every three percentage point (pp) decrease in GDP.
Okun’s Law is broadly supported by economists and used to estimate GDP. There are, however, a few points worth noting. First, Okun’s Law is more a ‘rule of thumb’ than a law as it is based on empirical data rather than theoretical conclusions. Second, it is an approximation as factors such as productivity levels, capacity utilisation, and average hours worked are ignored. This means, at times, the predictions are inaccurate. Finally, Okun only used US data, so his findings can’t easily be generalised. For example, in nations such as France or Germany, where the labour markets are less flexible than in the US, a drop in GDP has a much smaller impact on unemployment.
Since Okun’s original study, his work has been replicated in many countries, and country-specific Okun coefficients (the parameter that shows the strength of the impact of GDP changes on unemployment) are now available.
IMF research finds that New Zealand’s Okun coefficient is -0.47, suggesting that a 1pp decrease in our annual GDP growth rate will increase the unemployment rate by 0.47pp. In the December 2022 quarter, the annual GDP growth rate fell by 0.3pp, so the unemployment rate should have increased by 0.14pp. It rose by 0.2pp, suggesting that the labour market responded stronger to the drop in demand than expected.
A coefficient close to zero indicates that a change in GDP does not affect employment levels, suggesting that the labour market is inflexible. This could be caused by strong labour laws or government control, as in Singapore (-0.02) or China (-0.02). On the other hand, a coefficient further away from zero suggests that the labour market is dynamic and responsive, as in Australia (-0.57) and the US (-0.52).
Demographics
Looking at Okun coefficients across demographic groups in advanced economies shows that young people are likelier to lose their jobs if GDP falls (the coefficient for young men is -0.67 and for young females -0.53). Adult women are the least likely to be made redundant when a recession hits but struggle to find a job when the economy grows again.
The latest Statistics New Zealand data confirms this – the drop in GDP increased the unemployment rate of men by 0.4%, but for women, the rate fell by 0.2%.
The recent events remind us that banks are not immune to failure and that our economy is still on a rollercoaster ride.
But the news is not all bad.
Like during the GFC, our banks seem very resilient, and the economic slowdown and corresponding increase in unemployment will take the pressure off prices. I guess Adrian Orr had a good couple of weeks.
Christoph is a Professor of Innovation and Economics at Massey University, the Director of the Knowledge Exchange Hub (Massey University's big data-driven research centre) and the ambassador for Australia and New Zealand of the Kronberg Academy (Germany). This article was first published HERE
So, what’s the more pressing issue – the New Zealand banking sector and the ripples of a potential banking crisis reaching New Zealand’s shores or a negative quarterly GDP growth rate and the impact on unemployment?
New Zealand banks are in a strong and healthy position, thus, it is rather unlikely that the banking situation in the US and Switzerland will affect us. So, let’s talk about GDP and unemployment.
The September quarter was strong with a quarterly growth rate of 1.7%, but a considerable decline of production across all industries combined with lower-than-expected consumer spending, especially around Christmas time, and a drop in investments have brought our economic momentum to a halt.
Unemployment increased slightly from 3.3% to 3.4%, which is still low compared with 4.9% two years ago, but the highest for a year, nevertheless.
Intuitively, a negative relationship between GDP and unemployment exists. If GDP falls, less is produced, so we expect the unemployment rate to rise, and if unemployment falls, then more should be produced.
Okun’s Law
In the 1960s, Yale professor and economist Arthur Okun, also a member of US President John Kennedy’s Council of Economic Advisers, empirically investigated the relationship between unemployment and losses in a country’s production. His original findings, known as Okun’s Law, were that unemployment would rise by one percentage point for every three percentage point (pp) decrease in GDP.
Okun’s Law is broadly supported by economists and used to estimate GDP. There are, however, a few points worth noting. First, Okun’s Law is more a ‘rule of thumb’ than a law as it is based on empirical data rather than theoretical conclusions. Second, it is an approximation as factors such as productivity levels, capacity utilisation, and average hours worked are ignored. This means, at times, the predictions are inaccurate. Finally, Okun only used US data, so his findings can’t easily be generalised. For example, in nations such as France or Germany, where the labour markets are less flexible than in the US, a drop in GDP has a much smaller impact on unemployment.
Since Okun’s original study, his work has been replicated in many countries, and country-specific Okun coefficients (the parameter that shows the strength of the impact of GDP changes on unemployment) are now available.
IMF research finds that New Zealand’s Okun coefficient is -0.47, suggesting that a 1pp decrease in our annual GDP growth rate will increase the unemployment rate by 0.47pp. In the December 2022 quarter, the annual GDP growth rate fell by 0.3pp, so the unemployment rate should have increased by 0.14pp. It rose by 0.2pp, suggesting that the labour market responded stronger to the drop in demand than expected.
A coefficient close to zero indicates that a change in GDP does not affect employment levels, suggesting that the labour market is inflexible. This could be caused by strong labour laws or government control, as in Singapore (-0.02) or China (-0.02). On the other hand, a coefficient further away from zero suggests that the labour market is dynamic and responsive, as in Australia (-0.57) and the US (-0.52).
Demographics
Looking at Okun coefficients across demographic groups in advanced economies shows that young people are likelier to lose their jobs if GDP falls (the coefficient for young men is -0.67 and for young females -0.53). Adult women are the least likely to be made redundant when a recession hits but struggle to find a job when the economy grows again.
The latest Statistics New Zealand data confirms this – the drop in GDP increased the unemployment rate of men by 0.4%, but for women, the rate fell by 0.2%.
The recent events remind us that banks are not immune to failure and that our economy is still on a rollercoaster ride.
But the news is not all bad.
Like during the GFC, our banks seem very resilient, and the economic slowdown and corresponding increase in unemployment will take the pressure off prices. I guess Adrian Orr had a good couple of weeks.
Christoph is a Professor of Innovation and Economics at Massey University, the Director of the Knowledge Exchange Hub (Massey University's big data-driven research centre) and the ambassador for Australia and New Zealand of the Kronberg Academy (Germany). This article was first published HERE
2 comments:
Yep as long as colonial descendants pay tax. And other post white colonials.
i don't understand greens' demand for 'tax on excess profits'. what is defined as 'excess'? are we saying that bank profits are not taxed? would 'excess profit' be taxed differently from 'normal profit'? can they cut the emotions for once and state facts so the public can decide if the idea has any merit at all!
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