Following the release of the first quarter national accounts, it is worth reviewing the performance of some of the nowcasting models we have been referencing in this space. The Melbourne Institute’s real GDP nowcast was out by only a tenth of a percentage point at 0.2% q/q compared to the actual print of 0.1% q/q. The nowcast for the annual rate matched the actual outcome of 1.1% y/y.
The Xero Small Business Index annual sales growth measure on a three-month moving average basis was also equal to the nominal GDP print of 3.5% y/y. It is not surprising that small business sales growth tracks headline nominal GDP growth reasonably well. Many view nominal GDP as overly driven by the terms of trade, with the income gains/losses flowing mainly to capital rather than labour via the capital intensive mining sector, but the correlation with small business sales shows that NGDP growth is representative of the broader economy, which makes it an appropriate focus, if not explicit target, for monetary policy.