A Keen eye on the global economy: how our forecasters fared
It had just cut the rate twice, from 4.75 per cent to 4.25 per cent. The equivalent of five more cuts was unthinkable, except for Steve Keen.
The University of Western Sydney iconoclast is famously prepared to back his judgment.
Two years ago he walked 200 kilometres from Canberra's Parliament House to the top of Mount Kosciuszko wearing a shirt reading: "I was hopelessly wrong on house prices - ask me how", after losing a bet with Macquarie Group economist Rory Robertson.
A year before that he took this column's prize for most accurately picking the global financial crisis. Most of the rest of the BusinessDay panel didn't think it would happen.
Professor Keen is also the only member of our panel to come close to forecasting the inflation rate.
He picked a mere 2 per cent by December (which is exactly the most recent published figure). The other forecasts were about 2.8 per cent - not shabby but not Keen.
Keen's pessimism flowed from a belief global growth would slide to near 3 per cent (which it did) and that the terms of trade would collapse 10 per cent (which was probably an underestimate - in the first nine months of the year they collapsed 9 per cent).
But he was wrong about how badly the international downturn would hurt Australia.
In the year to September, Australia's economic growth held at 3.1 per cent (close to the average panel year-to-December forecast of 2.9 per cent). Keen had expected 1.7 per cent.
Unemployment is 5.2 per cent, much closer to the panel's average forecast of 5.5 per cent than to Keen's 6.5 per cent.
He was off the mark because the government flicked the switch to deficit far more sharply than any of our panel expected. Keen thought Wayne Swan would finish 2011-12 with a budget deficit of $20 billion. The panel picked $35 billion. Swan gave us $43.7 billion.
It's hard to believe now but a year ago only two of our panel thought the dollar would stay much above $US1.
Only Katie Dean, of ANZ, and Richard Robinson, of BIS Shrapnel, predicted a high dollar all year. They deserve special commendation. The panel's average forecast was US96¢.
Frequently Asked Questions about this Article…
Only one forecaster on the BusinessDay panel — Professor Steve Keen — predicted the Reserve Bank would cut its cash rate to 3.0% by December 31. The article notes the RBA had already cut twice earlier (from 4.75% to 4.25%), and most of the panel did not forecast the deeper cuts Keen expected.
Professor Steve Keen came closest on inflation, correctly picking 2.0% by December (the most recent published figure). Other panel members generally forecast about 2.8%, so Keen's lower, contrarian inflation call proved most accurate in this instance.
Keen forecast global growth would slide to near 3% (which the article says it did). He also predicted the terms of trade would collapse about 10%; the article notes they fell roughly 9% in the first nine months of the year, so his terms-of-trade call was close.
The panel's average forecast for Australia's year-to-December growth was about 2.9%, while actual year-to-September growth held at 3.1%—close to the panel average. The panel's average unemployment forecast was 5.5% versus an actual rate of 5.2%. Steve Keen's more pessimistic forecasts (1.7% growth and 6.5% unemployment) were off the mark.
The article points to a stronger-than-expected fiscal response: the government moved into deficit more sharply than panel members expected. Keen expected a A$20 billion deficit for 2011–12, the panel averaged A$35 billion, but the actual deficit was A$43.7 billion — a larger stimulus that cushioned Australia from the international downturn.
Only two panel members predicted the Australian dollar would stay much above US$1 for most of the year: Katie Dean of ANZ and Richard Robinson of BIS Shrapnel. The panel's average forecast for the dollar was around US$0.96.
The article illustrates that forecasts can vary widely: a contrarian forecast can be right on some measures (Keen on inflation and global growth) while wrong on others (domestic impact). Unexpected policy moves — like a bigger budget deficit — can materially change outcomes. For everyday investors, that means using a range of views, not relying on a single forecast, and factoring in policy and market shocks.
Yes. The article highlights Professor Steve Keen for making several bold calls (including inflation and global growth) and notes Katie Dean (ANZ) and Richard Robinson (BIS Shrapnel) deserve special mention for predicting a strong Australian dollar all year.
Call 1300 880 160
Start a chat
Schedule a call
