Monday's Top 10: The problem with forecasts; NZ growth in optimism; Libor smoking gun; speed limit impact; is political gridlock good?; a possible car revolution; Dilbert, and more

Here's my edition of Top 10 links from around the Internet at 10:00 am today. We now have a Monday-Wednesday-Friday schedule for Top 10.

Bernard will be back with his version this Wednesday. We will have another guest posting on Friday.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

See all previous Top 10s here.

1. 'The dismal art'
Economic forecasting has become much more sophisticated in the decades since its invention.

So why are we still so bad at it? wonders James Surowiecki who has reviewed a book on economic forecasting by Walter Friedman.

Or are they bad at all? Forecasts companies use to plan supply chains are unbelievable valuable and reliable. 

And despite the flaws of regulator's models, policy responses are much better these days at reacting; 2008 was nothing like 1929, despite the shouting of the worry-warts.

But there is another reason forecasts don't seem so accurate, and it is based on the fact that people think they are. More from Surowiecki:

The real issue here is one that the economist Oskar Morgenstern identified back in the late 1920s - namely, that economic predictions actually end up shaping the very outcomes they’re trying to predict. 

2. Optimism growth
For the first time since 2009, there are more optimists in New Zealand than pessimists in every region. This is according to today's Westpac regional economic confidence reports.

How much of this matches what you think in your region? 

Northland: Economic confidence has improved in Northland over recent quarters, and in March, optimists outnumbered pessimists for the first time since December 2009. Unemployment in the region has fallen over the last year, while the housing market looks to be gradually improving after a long period in the doldrums.

Auckland: Economic confidence in Auckland ticked higher in March, despite the Reserve Bank’s restrictions on low equity lending clearly slowing the housing market in the region. Perhaps the gradual improvement in employment prospects is providing an offset. Employment growth in the region has picked up, pushing the unemployment rate down to its lowest level since mid-2009. Growth in consent issuance also points to further improvement in building activity over the coming months with activity bolstered by growth in the apartment sector.

Waikato: Waikato remains one of the most upbeat regions of the country – no surprise given forecasts of a record dairy payout this season. However some parts of the region have experienced very dry conditions in recent months and this may be one reason economic confidence remains below the levels recorded six months ago.

Bay of Plenty: Economic confidence improved for the fourth consecutive quarter in the Bay of Plenty. The improved outlook for the Kiwifruit industry, favourable climatic conditions for dairy farmers and growth in building activity in the region have all no doubt played a role.

Gisborne/Hawke’s Bay: Economic confidence rose strongly in the Gisborne/Hawke’s Bay region, perhaps helped by positive expectations for the 2014 grape harvest. Improvements in beef and lamb prices will also be benefiting the region’s farmers. While still noticeably above the nationwide average, the unemployment rate has fallen over the last year.

Taranaki/Manawatu-Whanganui: Despite the strong outlook for the dairy industry, economic confidence in Taranaki/Manawatu-Whanganui fell a little this quarter. It’s difficult to point to a particular cause, with many of the key regional indicators improving broadly in line with nationwide trends. The Taranaki housing market has been relatively buoyant over the last year, in contrast to Whanganui where house prices have fallen over the last 12 months.

Wellington: Economic confidence in Wellington has lagged the national average for over a year as the government’s continued drive for fiscal belt-tightening permeated employment and growth prospects in the region. However economic confidence has gradually improved as the wider New Zealand economy has picked up, the unemployment rate has fallen, and there has been modest growth in house prices.

Nelson/Marlborough/West Coast: In this diverse region, economic confidence has continued to steadily improve and is now at its highest level since December 2009. With factors such as the second lowest unemployment rate in the country, and a solid outlook for the agriculture, horticulture and viticulture industries, this comes as little surprise.

Canterbury: Despite easing a touch this quarter, economic confidence in Canterbury remains streets ahead of any other region in New Zealand. The rebuild is powering ahead, and the income boost flowing to the increasingly important dairy sector should support rural activity in the region.

Otago: After lagging much of the rest of country over the course of 2013, economic confidence in Otago surged this quarter. It’s possible that the hunt for oil and gas off the coast has made people more optimistic about economic growth prospects in the region. In addition, labour market conditions have improved over 2013.

Southland: Economic confidence in Southland rose again this quarter, to its highest level since in two and a half years. Dairy is clearly an important part of the outlook for the region, and expectations of a record payout this season will have many in the region smiling.

3. Libor fantasy
Calling Libor 'fantasy rates' is something bandied around by critics - but that exact same term was used by Barclay's chief operating officer to his boss Bob Diamond in an email discovered in a trial Barclay's is facing in Britain.

Seems like a smoking gun to me.

Referring to “the whole Libor curve,” Del Missier said “the real story is that these are all fantasy rates.” Jerry Del Missier, former chief operating officer of Barclays, sent the message to Diamond and ex-head of investment banking Rich Ricci, according to Stephen Davies, a lawyer for Guardian Care Homes, the company suing the bank, the U.K.’s second-biggest by assets.

4. The king is dead; long live the king(s)
Australia's mining boom may be over, even if mining there continues to grow and prosper, according to a new Deloitte report.

Mining, which now makes up about 10% of Australia's economy, is set to be overtaken by growth waves in the "Fantastic Five" sectors of gas, agribusiness, tourism, international education and wealth management, Deloitte's report Positioning for Prosperity? Catching the next wave says.

Apart from the gas business, New Zealand should be in a similar position on all these sectors, I would have thought (although definitely behind Australia in 'wealth management'). We may gain in a strong halo effect if the Aussies succeed in this re-alignment. More from Business Spectator:

These could add $250 billion to the [Australian]economy over the next 20 years, potentially matching mining and keep Australia near the top of the world’s prosperity charts, Deloitte says.

At least a further $150bn in mainly high job creating areas of the economy is offered by a further 19 sectors, the report calculated.

“As Asia’s boom evolves and new domestic opportunities arise, our research shows that Australia’s growth options remain excellent," said report co-author Deloitte Access Economics’ Chris Richardson.

"Our future prosperity will come from a more diversified spread of sectors, enabling Australia to remain the fastest-growing developed Western nation in the world in the coming decade.”

5. Big impact
For those of us following it closely, the impact of the RBNZ's surprisingly tough new 'speed limit' policy has been remarkable. The data released with the March MPS allows us to see what a big change has been wrought - all to the chagrin of the banks. This represents a whole heap of mortgage business that did not get done. A related effect is that the regulator enhanced its credibility - adding 'fear' for the regulated banks, and 'relief' for taxpayers who wondered (during the Bollard era) whether they were too timid.

The other perspective this chart gives is what the 'stimulus' impact will be when the limits are wound back - although they will undoubtedly be done under the cover of more OCR rises.

6. Medicine on the cheap
Cuba is expecting to 'earn' NZ$9.5 billion from its Doctors Abroad program in 2014, mainly in exchange for oil from Venezuela and cash from Brazil. That represents about 10% of Cuba's GDP. They are hooked on the program.

And they are raising the 'salaries' they pay those doctors participating, after many threatened to quit given the pittance they are paid (up to about NZ$50/month). But other medical staff in Cuba may be even less enthusiastic - the Cuban government is cutting the island's medical community by 109,000 health care workers (about 25% of them) to pay for the raised salaries.

7. It's not the politics
Political gridlock in the US deserves much scorn. But the presumption that it is holding the US economy back seems to not follow. The US economy is adapting and growing much faster than may others, especially European ones where non-cultural perspectives make their politics seem tame by comparison.

I am reminded of the 1970-1990's in Italy. Their politics were a real mess, but the Italian economy shone, especially in northern Italy (away from crony crime influences). Then Berlusconi arrived with 'stable government' and things went downhill.

Michael Spence and David Brady have been looking at the US gridlock and relating it to economic performance.

Governments’ inability to act decisively to address their economies’ growth, employment, and distributional challenges has emerged as a major source of concern almost everywhere. In the United States, in particular, political polarization, congressional gridlock, and irresponsible grandstanding have garnered much attention, with many worried about the economic consequences.

But, as a recent analysis has shown, there is little correlation between a country’s relative economic performance in several dimensions and how “functional” its government is. In fact, in the six years since the global financial crisis erupted, the US has outperformed advanced countries in terms of growth, unemployment, productivity, and unit labor costs, despite a record-high level of political polarization at the national level.

The key advantage they see for the US is 'structural flexibility' - or in other words, the space to innovate, fail and try again. The whole essay is worth a read. A case for principled regulation rather than prescriptive regulation.

8. Bad news for car makers (and the end for dealers)
If self-driving cars become a reliable, safe, legal technology, they will likely change the way our cities function, even how they look. Google has a system, California is making regulations so the whole scenario may be closer than you think.

Singapore has been thinking too, and they reckon they may only need about one third of the vehicles they currently have. This is from The Atlantic:

Picture a fleet of these driverless cars, constantly swarming around a city, with no homes, no owners, no places of rest. It's bad news for taxi drivers and delivery men and women, undoubtedly, but it could also have dramatic, negative consequences for the car industry.

Why? Because we simply won't need very many cars, at least not compared with how many we have now.

For the amount of driving [we] do, we own an extraordinary number of vehicles. Today, the average private vehicle is in use less than 10 percent of the time. Most of the day, cars are just sitting parked somewhere.

But with a shared fleet of autonomous cars, we'd be able to drastically increase the hours per day each cars was in use. Instead of driving your car to work and leaving it at the lot all day until you used it again, you'd only need the car for the duration of the drive. Then it'd go on to other things.

We adopt tech fast these days. Who's to say we wouldn't adopt these innovation quickly too - apart from the petrol heads who would still need their fix, presumably.

I reckon it would put Auckland Transport buses out of business too. Public transport only really appeals to those who have time to waste, willingly or unwillingly, or are in highly routine employment structures. But those types of jobs are being eaten up by The Second Machine Age (software). Personalised, on demand, door-to-door transport without the parking hassle will beat public transport every time. We are about to have the technology.

Now we find NZ wouldn't need the 2.35 million vehicles on our roads. So we are not Singapore; we will need more than one third. Even if we need two thirds, that is still 750,000 vehicles 'saved'. There would be huge implications. It would probably 'socialise' the ownership of autonomous vehicles, or at least the regulation of major [private?] systems.

9. Over the next 2 years ...
The next big financial reform in China is to free up the setting of deposit rates, letting the market decide. But it won't be fast - it may take two years to unwind the current regulations.

Presumably one reason Chinese cash-rich investors seek offshore opportunities is that holding cash inside China yield's very low returns. Reuters has the detail:

"Our priority this year and next year is pushing forward reform of bank deposit rates," Yi Gang told an economic forum in Beijing.

 

The central bank will relax control of interest rates on a wide range of fixed-income products and bank deposits, Yi said, adding there would be "substantial progress" ahead.

 

Central bank chief Zhou Xiaochuan said earlier this month deposit rates were likely to be liberalized in one to two years, but government economists and policy advisers told Reuters they believed the central bank was treading cautiously as economic growth slows.

 

The central bank already allows banks to set their own lending rates, but in practice they do not have full freedom because of controls on deposit rates.

10. Today's quote
"Never stand begging for that which you have the power to earn." - Miguel de Cervantes