Government | Regulation

Issues with economic forecasts: Federal Treasury

There has been an unusual degree of error in recent economic forecasts, Federal Treasury Macroeconomic Conditions Division Principal Advisor, Warren Tease has told the launch of CEDA’s Economic and Political Overview in Brisbane.

Speaking on the outcome of his recent review into Federal Treasury forecasting performance and capability, Mr Tease said: “A key feature of economic forecasting in the last five years has been the persistent over prediction of economic growth and that’s happened around the world.

“This is a little unusual. Economic forecasts are mostly wrong but history tends to show that they are not often persistently wrong in the same direction for any length of time, so this is an unusual event that we are working through,” he said.

“I think there are specific economic reasons for that … but I also think forecasters in general find it very difficult to incorporate unusual events or large shocks. 

“In my review of Treasury’s forecast capacity… they were challenged when conditions were unusual.

“I identified several reasons for this. The first simply is it’s harder to forecast when you are going through an unusual event or a persistent change in structure of the economy. The second is more inherent in Treasury’s forecasting practice and I identified a likely bias in Treasury’s forecasts to produce trend like consensus outcomes.

“As users of economic forecasts my strong advice is to treat point estimate forecasts of growth, inflation, particularly financial market variables, the Budget, as just one of a range of outcomes we may see.

“The process of forecasting is not just about generating point estimate outcomes, even though they attract most of the attention.

“It is also about exploring the uncertainties around the outlook as policy, business and investment decisions are all about probable outcomes in an uncertain world.”

DHL Express Oceania CEO and Senior Vice President, Gary Edstein provided an export business perspective highlighting that the last five years had seen a positive trend in the DHL express division, with the exchange rate having an impact on export confidence.

“We’ve been traditionally a business to business company but we’ve moved more towards consumers,” he said.

“We are seeing significant growth in the SME (small and medium size enterprises) market here in Australia and it is being very much driven by technology and e-commence.

“The web is allowing SMEs to sell direct to global end consumers and thus cutting out the middle man, ie distributors.

“We are seeing a move from commodity driven to an innovative high quality product momentum, exports of high quality, high volume product especially from those organisations with a high level of IP (intellectual property) in design and marketing.”

To sustain this growth he said it would be very much technology driven.

“Key to this will be the completion of the NBN,” he said.

“We need to also continue to focus on infrastructure with development of airports and ports…we also need to see the continued reduction of barriers to trade.”

Commonwealth Bank of Australia Chief Economist and Managing Director Economics, Michael Blythe said the pessimism that has characterised views on the Australian economy in recent years is again on display at the start of 2016.

“The same debate about the risks of recession has resurfaced again and it is easy in many ways to understand in many ways why,” he said.

“We are going down that depressingly familiar path we have seen before of global growth downgrades, rising financial market uncertainty and volatility and of course concerns about the economic outlook in general.”

However, despite this he said: “I think when we get to the end of 2016 and look back we’ll see an economy we’ll be pretty happy with.”

“We will continue to grow at a below trend pace for sure this year but it is a long way from that recession risk that features in the conversation,” he said.

“I think we will still be looking at an unemployment rate that is too high but we think jobs growth will be positive through that period.

“These conclusions no doubt look a little bit optimistic when you benchmark them against the fear and loathing in financial markets… particularly I would say that when you benchmark that fear and loathing, that volatility against the economic fundamentals, then finance markets do appear to be far too pessimistic.”

Providing a market snapshot, Ai Group Chief Economist, Julie Toth said the headline numbers are ok but they’re not great.

“We are below trend and we have been for much of the last decade,” Ms Toth said.

“I think for 2015 we did see a bit of a change in mood and a bit of a role reversal between the mining sectors and the non-mining sectors of the economy.  Growth has really been dominated by mining output growth and investment growth…but the other industries have been quite lacklustre.”

However, she said we did see an uptick in the services sector – 70 per cent of the economy – which promisingly started to strengthen in the second part of 2015.

Credit Suisse Australian Investment Banking Chairman, John O’Sullivan said from an investment bankers’ perspective 2016 is expected to be a bit of a bad news good news story.

He said while sector performance was down there were positives, with healthcare, industrials and utilities up.

“That supports the thesis that the stock market at least buys the transition story that Australia is transitioning from energy, oil and gas and mining to industrials and services,” he said.

Providing a political overview, Crosby Textor Managing Director and Co-Founder Mark Textor said on what are the most important issues for Australians, there have been two schools of thought.

“That Australians are strugglers and battlers… and need somehow protection from governments economically,” he said.

“The other school of thought is that Australians are economically arrogant…over the last 25 years they have sailed their way through the world on the back of the mining boom, (and) have no idea of their relevant economic privilege.

“The truth is somewhat different to those two.

“Australians have been aware of the unique position they have been in…they have been aware they have had uniquely favourable circumstances in terms of demand for our energy and resources, our relatively stable economic base, (and) our relatively good regulatory system.”

He said Australians do feel privileged, not arrogant, but that they have been on an economic pedestal.

They see that pedestal developing cracks; they have seen a dramatic change in our economic indicators and an economy in transition. This has been coupled with political instability with a high number of changes to political leaders both at a Federal and state level in the last five years, he said.

“The political economy is one of: I want more political stability and less gratuitous political change but I do want growth and positive change in terms of the management of this transition,” he said.

“The ability of political parties to convince voters that they are the best at that will be core to the next election.”

Mr Textor also said it was likely at the next election we would see a maturing of tactical voting as seen in the UK and in some marginal seats in Australia already.


More videos from the event below.