Australia: Economic Forecasters Lose Their Way in Extreme Weather
ECONOMICS, 9 Jan 2012
WHO would have thought it? Certainly none of the 20-odd members of the economic forecasting panel this time last year.
The rate of inflation turned out to be higher than the highest of their predictions, the budget deficit bigger than the biggest, and the sharemarket far lower than all but two thought likely.
It is trite to say it, but they did not know what was coming. Days after their forecasts were printed, Queensland was hit by massive floods, and then a cyclone.
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The cyclone alone was enough to push inflation out of their ballpark. In the year to September, it came in at 3.5 per cent.
Without sky-high fruit and vegetable prices, pushed up after the trees were torn down, it would have been 2.9 per cent, which was exactly their average forecast.
Underlying inflation is now very low and headed down, and bananas are being picked again, making this year’s average forecast of 2.8 per cent look pretty reasonable. Unless there is a surprise.
The panel expected a hefty budget deficit in 2010-11, but it reckoned without the cyclone, which lifted it to $47.7 billion instead of the central forecast of $35.3 billion.
The deficit forecast for 2011-12 is $11.7 billion. Lower than expected coal income as mines are cleared of water, reduced capital gains and higher than expected reconstruction spending are projected to push the deficit to $37.1 billion.
Do not blame the government for failing to pick the sharemarket malaise that stalled capital gains. Most of the forecasting panel had their heads in the clouds. The index began the year at 4970. The panel members who worked for stockbroking firms expected 5500 or more. The average forecast was 5169. But the market drifted down and then collapsed 200 points in August on renewed concerns about financial turmoil, never recovering.
Only two members of the panel – Jakob Madsen of Monash University and Steve Keen of the University of Western Sydney, both academics – had expected the index to fall. They had punted for 4000, which is about where it will end up.
By and large, the panel overestimated the rate of economic growth and underestimated the rate of unemployment, which was to be expected given that it did not know about the natural disasters.
Where it was too pessimistic was in its expectations about commodity prices. It expected terms of trade to fall rather than climb further, as did the Treasury, although they are slipping now.
Go to Original – businessday.co.au
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