So what might 2013 look like in terms of GDP growth and inflation? To answer that question I went to the IMF World Economic Outlook Database (October 2012) and downloaded GDP growth and inflation data for 2012 and 2013.* I did this for the 35 economies known as “Advanced economies”. I then created two variables “Excess GDP Growth” and “Excess Inflation” defined as the 2013 value less the 2012 value. So if GDP growth in 2013 is expected to be higher than (expected) GDP growth in 2012 the value of the Excess GDP will be positive. Similarly, if inflation in 2012 in 2013 is expected to be higher than (expected) inflation in 2012 the value of the Excess Inflation will be positive. Ideally we’d like to see positive Excess GDP and negative Excess Inflation (unless you can think of a story why higher inflation is a ‘good’ thing – regrettably some people do think that).
I then graphed the data – the red dot is Australia.
As can be seen the bulk of advanced economies are expected (by the IMF) to enjoy higher GDP growth in 2013 than in 2012 and lower inflation than in 2012. Australia is one of two economies (along with Norway) expected to experience lower GDP growth in 2013 than in 2012 and higher inflation in 2013 than in 2012.
* these data are still forecasts.
kelly liddle
21 Feb 13 at 1:39 am
Sinc,
On inflation, there’s the argument that a small level of inflation is a very good thing in a contraction, in that real wages fall and labour markets clear more easily. Is that wrong?
Piett
21 Feb 13 at 3:38 am
I suspect the uncertainty on those values has got to be huge given they are a differential of a guess…
Driftforge
21 Feb 13 at 6:35 am
If the Worlds Bestest Ever Treasurer Maxwell Swan doesn’t give this his blessing I for one will spit in the general direction of the IMF because they are always wrong except when they are right.
Mark
21 Feb 13 at 6:54 am
Piett – that is an argument I hear often. It has apparent benefits that social engineers would find attractive. I’m not convinced that it would be (a) succeed (b) the costs outweigh the benefits (c) actually implementable (i.e. inflation can’t be turned on and off at a policy maker whim).
If you’re interested in some reading in the area I can recommend Tiger by the Tail and Less than zero: the case for a falling price level in a growing economy.
Sinclair Davidson
21 Feb 13 at 9:02 am
Driftforge – quite possibly. But expectations are always guesses. Just the level of sophistication varies.
Sinclair Davidson
21 Feb 13 at 9:04 am
Given that Australia and Norway are two of the best performing economies in the world, I suspect that graph merely shows that the forecasts predict a gravitation towards long term means, and are not particularly informative.
m0nty
21 Feb 13 at 9:35 am
China is paying megabucks for what we dig up outa da ground and therefore Shane Wand is a genius.
I wonder who’s the genius behind Norway’s economy?
The brilliant finance minister who orchestrated oil drilling off-shore?
JamesK
21 Feb 13 at 9:44 am
Sinc, hasn’t the RBA been showing they can keep pretty well within a low inflation band?
It’s pretty clear we want a falling price level, but the best falling price level is the real one that is hidden under some low nominal increases.
I’m sure steady states are relatively hard to maintain, but which is easiest? Low nominal inflation, no nominal inflation, low nominal deflation?
Pedro
21 Feb 13 at 1:57 pm
Pedro – if you think that < 3% is low. Sure by some Latin American and African standards that is very low. But I'm not convinced. I also worry about measurement errors.
Sinclair Davidson
21 Feb 13 at 9:22 pm
Not sure what you mean by nominal inflation.
Sinclair Davidson
21 Feb 13 at 9:28 pm
I didn’t fuck up. I just gravitated towards the long-term mean.
wreckage
21 Feb 13 at 9:37 pm
Sinc, by low nominal inflation is was just making it clear that I mean the apparent inflation that is hiding real deflation in constant dollar terms.
As for the rate, whether it should be 1, 2 or 3 is not the point. I think there is good evidence central banks can hit their targets and stay in their ranges over time. Which is contrary to your tiger by the tail concerns, though Hayek was obviously talking about keynesian inflation and not monetarist (let’s say) inflation.
Pedro
21 Feb 13 at 10:55 pm
Maybe – it all depends if the great moderation is the “new normal” or if it was “unusual”. I’d like to think it was the new normal – after all in an advanced economy inflation is likely to be a policy error and not a means to expropriate wealth from citizens (the modern welfare state has a whole range of other ways to do that).
Sinclair Davidson
21 Feb 13 at 11:02 pm
LOL, it sure does. You’d have to think the nearly 30 years or so (more for the Bundesbank) is evidence they can do it.
Pedro
21 Feb 13 at 11:54 pm
I suspect the bundesbank are a special case. The Germans have exactly the right attitude to inflation.
Sinclair Davidson
21 Feb 13 at 11:59 pm
The inflation basket seems to have a lot of holes in it. Plenty of stuff seems to fall out on the way to the calculator.
How anyone can say inflation is low when energy prices have been going up by 20%+ per year for the last 5 years is beyond me. Same for rent, same for all sorts of things.
brc
22 Feb 13 at 12:06 am
And train timetables.
They must get a lot of benefit from the EU arrangement to make up for the risks of letting the Mediterranean versions of Wayne Swan interact with their financial arrangements.
WhaleHunt Fun
22 Feb 13 at 12:08 am
Personally I think some economy, somewhere, should go through a period (say 3-5 years) of mild deflation to really see what happens.
Inflation/deflation is a two way street, just like currencies. Some people love a strong dollar, others don’t. It’s the same with inflation and deflation. I’m not convinced that it’s the death spiral everyone says it is, when many individual markets experience deflation for prolonged periods, and still manage OK.
brc
22 Feb 13 at 12:09 am
brc, you might have noticed a few things getting cheaper at the same time, inflation is supposed to be about th general price level. I haven’t looked for a while, but the story used to be that inflation was most likely being overstated not understated.
Pedro
22 Feb 13 at 12:15 am
and brc, it’s called japan, and hasn’t that been fun for them.
Pedro
22 Feb 13 at 12:16 am