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Economic forecasts, estimates and models.

Posted by Greg Atkinson on Nov 7th, 2008

It seems that 2009 is going to be one those years where economists,politicans and investors etc. will find out just how inaccurate most economic forecasts really are. In the good years if growth estimates for the economy are off the mark nobody seems too stressed, but when economic conditions deterioate people tend to get more concerned about forecasts. As a result there is a tendency for all of us to start treating forecasts as a guide to how economic conditions will unfold, when in fact they are at best, a rough estimate to how the economy “might” perform.

Most of us have probably already factored into our plans for next year that many of the worlds economies will not be growing. Governements in the U.S, U.K, Germany, Japan, Australia and others will be desperately trying to avoid thier countries slipping into recession or at least, attempt to make the recession as short as possible. In China they will be working to maintain growth in the face of a significant fall in demand for Chinese exports, and we can only hope Chinese domestic demand will hold up.

But never fear, to help us through these troubled times we have the government boffins in Canberra who with their complex economic models, have been able to provide an economic outlook for 2009. According to the boffins growth in Australia will slow to 2% next year and the Teflon Man (Kevin Rudd) has assured Australians that the country will not slip into recession…phew, that was close! Of course any “model” is only as good as the data you feed into it, so if the boffins have made some blunders with their date entry assumptions then their model based forecasts will also be wrong. Remember it is the same government boffins telling us growth in Australia will be 2% that also messed up the revenue forecasts from the “alcopops tax”. So if they cannot sort out a model to handle a relatively simple domestic forecast then you really have to question their wider economic forecasts for 2009.

If you think things through logically then it is obvious that nobody has any real idea (whether they use economic models or not) of what growth in Australian will be next year. Some of the great unknowns are for example:

- What will the demand be from Japan and China for our commodities?
- What actions will the new U.S President take in 2009 to stablize the U.S economy? Will General Motors be saved, will other U.S companies be bailed out, will a floor be put under the U.S housing market etc?
- What steps will China take to mainatin growth and how much are they prepared (able) to pump prime their own economy?
- Who will win the national election in Japan? What steps will the new government take to kick start the Japanese economy again? Will Taro Aso still be the Prime Minister? (and will he still be having late night drinks in upmarket bars in Tokyo?)
- How bad will things get in Europe?
- How will the Australian rural sector fare? Will it be a good year for farmers or not?
- How many Australians will lose their jobs?

All the above issues will have an impact on the Australian economy and nobody on this planet can accurately predict how any of them will unfold next year. China could surprise us all with strong growth next year or Chinese domestic demand could collapse….your guess is as good as mine.

So beware of boffins bearing economic models. My reading of the tea leaves tells me to be ready for a major slowdown in 2009 and that the Australian economy could be in for a very nasty turn if jobs start to be shed in the mining sector. Rudd and Swan may tell you Australia is better positioned to handle the global crisis than most other developed countries, but this is simply not true..we are as plugged into the global economy as anyone else.