Economic Weekly: When getting it wrong is something to celebrate

Economics is a profession in which being wrong with your predictions is an all-too-common part of the job.  After all, if we were that good at getting our predictions right we would have long ago retired to our private paradise islands after giving Warren Buffett a run for his money or have a charitable foundation that dwarfed that of Bill and Melinda Gates.

It’s a tough life being wrong so much!  And that is why we spend so much time focusing on why we think something will happen as much as what will happen.  It is important that people understand the context, the underlying assumptions, the various alternative outcomes that could occur under different conditions.  That way people can take all of it on board when making their own decisions about how the economy could affect them in the future.  We are trying to be roughly right (in giving a broad direction of travel) than precisely wrong.

Stepping back to late March and early April of last year, one of the key assumptions that underpinned many people’s expectations for the economy was how many jobs would be lost and how influential any uncertainty around job security would be on people’s spending behaviour.  It was a period in which we (and others) estimated that about one-third of economic output would be lost for an unknown period, with wide ranges of assumptions made about when COVID restrictions would be lifted here and abroad.  It was a time when no-one really knew how people would react to such a sharp and globally-synchronised grinding to a halt of normal activity in the face of a very different threat that people were not psychologically used to dealing with.  And, at the time, the full extent of fiscal and monetary support – and its ultimate effectiveness – were also unknown.

In the end, the number of job losses has been mercifully small, and mainly confined to those parts of the economy most directly affected by the border closure.  Last week’s release of the Q4 lift in jobs showed just how strongly the labour market has performed.  Factors such as the wage subsidy will have made a difference, through encouraging employers to keep people employed even as businesses had no idea about whether they will continue to operate or how many people they will need in the future.  Extremely low interest rates also turned the housing market rebound into a strong boom.  Along the way, for many the fear of losing their job disappeared very quickly once the restrictive COVID levels were past.  Money earmarked for overseas holidays has also been channelled into having a good time in NZ, whether through feathering the nest, touring the country, buying holiday properties or new ‘toys’.  All this, within the freedom of primarily Level 1 conditions, has muted job losses and helped create new ones.  It’s one of those times when it is a huge relief to be so wrong.

We expect employment to continue trending higher.  The unemployment rate may already be at or past the peak – well below our lockdown predictions of ~9%.  nick.tuffley@asb.co.nz