Forecasts, forecasts, forecasts – whose and for what purpose. This may emerge as something of an issue in the budget debate, partly in regard to whether the reverse Keynesian “stimulus” in the budget is going to actually help lift the rate of growth from 2.5% in the half year to December 2011 back to the trend rate of 3.25% in 2012-13 already over-publicised by Treasurer Swan. Or is it to 3.0-3.5% as published yesterday by the Reserve Bank ( which has a seat on the forecasting committee of officials).
The official record has not been crash hot. In the May 2011 budget the forecast for growth in 2011-12 was 4% but in November this was revised down to 3.25% in the Mid-Year Economic and Fiscal Outlook. Now the RBA is forecasting 2.75% but with relatively low levels of business and consumer confidence it could be lower (with growth in the half year ended December 2011 at only 2.5%pa, the RBA assesses it as only “modest” in the March quarter).
As to the extent forecasts are to be believed, they seem to have become to some extent politicised, that is they tend to be tweaked so as to try helping improve business and consumer confidence. This is patently obvious in regard to forecasts of global growth by bodies like the IMF and OECD. Whether such tweaking any longer has a positive effect on confidence must be doubtful. Indeed in Australia, where there is considerable uncertainty about the capacity of the Gillard government to govern effectively, tweaking is more likely be unhelpful to confidence and growth.
The RBA’s global growth forecasts provide for 3.5% this calendar year and 4% next year, in line with the IMF’s of April. While not commenting on the desirability or otherwise of fiscal consolidation or other policies in Europe, the RBA notes it is still experiencing a “negative feedback loop between fiscal consolidation and growth”. It is acknowledged that the situation in Europe “remains fragile” but avoidance of a severe contraction is “assumed”. Elsewhere the risks to growth are “slightly tilted to the downside”, with the US expected to continue “to expand at a moderate pace”, only part of the legislated fiscal consolidation achieved but “a larger consolidation” having adverse effects. China is to slow to a “more sustainable pace”.
The forecast for Australia includes an upward revision to mining investment but weaker investment elsewhere and “well-below trend” public final demand, with “fairly subdued” employment growth “as it has been over the past year” and labour shedding “may accelerate” in relatively employment intensive industries. There is no reference to possible adverse effects from labour market regulation and “the shedding” seems mainly to be attributed to lower demand affecting various industries.
There is a downward revision to exports (partly attributed to inadequate transport facilities) and to residential building activity. A further decline is expected in our terms of trade because of increased global production of bulk commodities ie our producers face increasing competition.
Overall, we have a forecasters conclusion for Australia – “there are both upside and downside domestic risks”. It is a pity that there are questionable references and non-references to policy issues.
My letter published in today’s Australian expresses the hope we that the budget papers tabled by Treasurer Swan and Finance Minister Wong will clearly explain the basis of the forecasts, including the effects of reverse stimulus.
Growth questions surround next Tuesday’s budget
letter published in The Australian, 5 May 2012
Many will be hoping Tuesday’s budget answers two important questions about the state of the economy.
First, why is the government only touting a return to Australia’s average annual growth rate of 3.25% when we have booming activity in mining and associated industries? Surely this suggests we should be growing faster than average.
Second, is there in fact any basis for expecting growth to increase from the 2.3% pa rate in the second half of 2010 (seasonally adjusted) to the 3.25% rate when surveys show business and consumer confidence at low levels and the non-mining sector performing very sluggishly (“Slowdown casts doubt over the budget”, 4/5)? What new policies in the budget will help lift growth to where it should be?
Des Moore, South Yarra Vic