Time for economists to play guessing game
THE TIME HAS come again for the regular economic report to tell us how much our gross domestic product grew in the first quarter and for several weeks now economists around town have been sucking their pencils to make forecasts.
The closer they are to the world of academia the more that this somewhat academic figure absorbs them, but all economists like to boast of their forecasting prowess if they get it roughly right and to tell you why the figures were anomalous if they do not.
The approved way to do it is to look at all the components of GDP and use other already published statistics to make estimates before putting the pieces together once more and summing them up.
I like doing it the easy way. However different we may think Hong Kong from other countries of the region, the fact is that in economic growth they all go up and down by about the same amount at the same time, particularly if you exclude China and Japan.
It is what I have done in the first chart and I am helped in this exercise by the fact that Hong Kong is always late in reporting GDP. South Korea, Taiwan, the Philippines, Malaysia, Singapore and Indonesia have already reported their first-quarter growth figures and the green line represents the weighted average of these six.
The red line represents Hong Kong's GDP growth and the blue bit on the end is my forecast. It is easily calculated. Push it up by about the same amount that the green line has risen and you get 6.5 per cent year on year, up from 5 per cent in the first quarter. I think it is as good a way of guessing the growth rate as the approved method.
In fact, if anything, I think the announced figure will be higher. The first quarter last year was already affected by Sars and the first quarter this year ended before any slowdown we may have since seen because of worries that interest rates will now rise.
The second chart suggests to me that the rest of Asia may also have published growth figures that are on the low side. GDP growth is historically closely related to growth in electricity consumption. It is usually a little lower than the track for power growth but always up and down at the same time.
The red line shows the weighted average of GDP growth in Asia excluding Japan and the blue line represents electricity consumption growth. The margin has clearly expanded over the past few years. In most ways I trust the electricity figures more. They are hard numbers, which is not something you can say about GDP.
But my interest when our first-quarter GDP figures are announced will not be on the headline growth number. I am more interested in what they will tell us about deflation.
When we speak of Hong Kong's record of deflation since mid-1998 we base it on the consumer price index, which may be an important measure of prices for our daily living expenses but is not the only one.
Equally important, and to our industries perhaps more so, is the GDP deflator. This tells us about changes in the overall level of prices in our economy, not just about consumer prices, and what makes the GDP deflator a measure of particular interest at the moment is that for the final quarter of last year it said overall prices were still declining by a year-on-year rate of 4.8 per cent.
This is distinctly at odds not only with the more recent trend of consumer prices but with measures of import prices and prices in retail goods outlets.
The GDP deflator has its failings, too, most notably that it is often skewed by foreign trade figures, but we are just at the point of coming back out of deflation and into inflation, and that makes any indicator of a change in the trend worth watching. The implication for interest rates and prices of financial assets could be a big one.