A Keen eye on the global economy: how our forecasters fared

THIS time last year, only one of our forecasting panel was bold enough to say the Reserve Bank would cut its cash rate to 3 per cent by December 31.

By InvestSMART · 5 Jan 2013

By InvestSMART ·
5 Jan 2013

Comments

THIS time last year, only one of our forecasting panel was bold enough to say the Reserve Bank would cut its cash rate to 3 per cent by December 31.

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¢.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

How accurate were the panel's Reserve Bank cash rate forecasts, and who predicted a cut to 3% by year‑end?

Forecasting the RBA cash rate proved difficult. Only one member of the BusinessDay forecasting panel—Professor Steve Keen of the University of Western Sydney—predicted the Reserve Bank would cut the cash rate to 3% by December 31. That call stood out because the RBA had recently cut the rate from 4.75% to 4.25% and further cuts were widely seen as unlikely.

Which forecaster got the inflation forecast closest and what were the panel's inflation expectations?

Steve Keen was the only panel member to come close to the actual published inflation figure, forecasting a 2% inflation rate by December (the most recent published figure). Most other panel forecasts were around 2.8%.

What did the panel predict for global growth and the terms of trade, and how did those predictions compare with actual outcomes?

Keen expected global growth to slide to near 3%, which turned out to be accurate. He also predicted the terms of trade would collapse about 10%; actual movement in the first nine months was roughly a 9% fall, so his terms‑of‑trade estimate was close, perhaps a slight underestimate.

How did panel forecasts for Australia’s economic growth and unemployment compare with actual figures?

Australia’s year‑to‑September economic growth held at 3.1%, close to the panel’s average year‑to‑December forecast of 2.9%. Steve Keen had expected only 1.7%. Unemployment was 5.2%, nearer the panel average forecast of 5.5% and well below Keen’s 6.5% forecast.

How did government budget deficit surprises affect forecast accuracy?

The government moved to a larger deficit than most forecasters expected, which helped explain some forecasting misses. Steve Keen expected a 2011–12 budget deficit of $20 billion, the panel average was $35 billion, and the actual figure announced by Wayne Swan was $43.7 billion—substantially larger than many forecasts.

Who predicted the Australian dollar would stay high, and what was the panel’s average currency forecast?

Only two panelists—Katie Dean of ANZ and Richard Robinson of BIS Shrapnel—predicted the Australian dollar would stay much above US$1 all year. The panel’s average forecast for the dollar was US96¢.

What do the panel’s mixed forecasting results tell everyday investors about relying on economic forecasts?

The panel’s experience shows forecasting is inherently uncertain: some individual calls (like Keen’s inflation and RBA‑rate forecast) were notable hits, while other predictions missed because of unexpected policy moves and economic resilience. For everyday investors, the takeaway is that forecasts vary widely and can change with policy decisions and global developments.

Were there any notable personalities or anecdotes among the forecasters that might help investors assess credibility?

Yes. Professor Steve Keen stood out for bold, sometimes unconventional calls—he previously picked the global financial crisis accurately, made public wagers (losing a bet to Macquarie Group economist Rory Robertson), and even undertook a 200‑kilometre walk after a forecast loss. Such anecdotes illustrate that forecasters bring differing styles and conviction to their predictions.