Horoscope Beats Economists in Inflation Forecasting
JK Galbraith, a giant of 20th century economics, said the purpose of economic forecasting is to make astrology look respectable. This week's inflation numbers bear out his maxim.
This week, the horoscope was at least as good a guide as the economic modelling of the pundits.
Markets were expecting a rise of 1 per cent in the June quarter; that was the average and median forecast of the financial market economists paid to pick these things.
The lowest prediction of the pundits was a rise of 0.8 per cent.
In fact, the official headline rate came in just 0.6 per cent and the underlying rate even lower, at 0.5 per cent.
Now the market economists usually get it wrong, but in the catalogue of failed forecasts, that's right up there.
And one of the market pundits says it's not unusual to be wrong.
"The dirty little secret of economists, is that very few people are very good a forecasting anything that matters," said Rory Robertson, the interest rate strategist at Macquarie Bank, pulling no punches.
"Everyone knows in their heart of hearts that the future is unknowable and that fact makes forecasting inherently unreliable," he added.
None more so than the prognosticator at Merrill Lynch who tipped a 1.2 per cent surge in the inflation rate; he would have been better off consulting the heavenly bodies.
Not much harmony and understanding on the campaign trail, but its hard to see the surprisingly soft inflation reading as anything but good news for Labor.
It spares it the political pain suffered by the Howard government in the lead-up to the 2007 poll - an interest rate rise, in the middle of the campaign.
Because one forecast can now be made with absolute confidence: the Reserve Bank will not lift the cash rate when its board meets next week.
"This was a remarkably low number," said Westpac's chief economist Bill Evans, who was forecasting a rate rise next week prior to the inflation numbers.
"The core number which the Reserve Bank relies on for its policy decisions printed 0.5 [per cent]; our forecast was 0.9 [per cent]. I think 0.9 would have delivered a rate hike; on 0.5 we can absolutely be confident that there'll be no change in rates next week."
Despite the forecasting failures, Rory Robertson says that, for the pundits, the inflation figure was a good outcome.
"Economists wanted a big one where a rate hike was sure, or a little one where rate hike was not happening. A 0.8 would have been a nightmare because many of us would have spent the next week umming and ahing about whether there would be or wouldn't be a rate hike," he explained.
"With a 0.5 on the Reserve Bank's best measure of core inflation, there's no rate hike next week. In fact it looks like the Reserve Bank will be on hold for the next three months at least, and I'm guessing the Reserve Bank will be on hold at 4.5 per cent into 2011."
The numbers will be no surprise to Gerry Harvey at Harvey Norman, or the bosses of Woolies and Coles. They reckon there's a price war underway to get customers in the door and spending.
The inflation reading also confirms that the interest rate rises delivered so far by the Reserve Bank and the retail banks are biting and that despite the low unemployment rate, parts of the economy are still in pain.
"The household sector right now is dealing with the biggest uplift in mortgage rates in at least two decades in that the shift in mortgage rates of 1.6 percentage points, to about 6.75 per cent, is in fact the sharpest lift in mortgage rates in two decades," Rory Robertson explained.
"So I think it's increasingly clear that that is having the desired dampening effect on the household demand where basically consumption growth is sluggish, home building, local government building approvals have peaked.
"It's clear that the up trend in home prices has completely stalled. Also it's clear, and you can see that in the prices day to day, that the tourism sector in Australia is on its knees. We know the economy is strong on average but much of the strength is via the resources sector. Lots of other parts of the economy are sluggish at best"
And you don't need any powers of divination to see that.
Copyright: arcticle: Stephen Long, ABC News
Original article from: http://www.abc.net.au/news/stories/2010/07/29/2967360.htm
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JK Galbraith, a giant of 20th century economics, said the purpose of economic forecasting is to make astrology look respectable. This week's inflation numbers bear out his maxim.
This week, the horoscope was at least as good a guide as the economic modelling of the pundits.
Markets were expecting a rise of 1 per cent in the June quarter; that was the average and median forecast of the financial market economists paid to pick these things.
The lowest prediction of the pundits was a rise of 0.8 per cent.
In fact, the official headline rate came in just 0.6 per cent and the underlying rate even lower, at 0.5 per cent.
Now the market economists usually get it wrong, but in the catalogue of failed forecasts, that's right up there.
And one of the market pundits says it's not unusual to be wrong.
"The dirty little secret of economists, is that very few people are very good a forecasting anything that matters," said Rory Robertson, the interest rate strategist at Macquarie Bank, pulling no punches.
"Everyone knows in their heart of hearts that the future is unknowable and that fact makes forecasting inherently unreliable," he added.
None more so than the prognosticator at Merrill Lynch who tipped a 1.2 per cent surge in the inflation rate; he would have been better off consulting the heavenly bodies.
Not much harmony and understanding on the campaign trail, but its hard to see the surprisingly soft inflation reading as anything but good news for Labor.
It spares it the political pain suffered by the Howard government in the lead-up to the 2007 poll - an interest rate rise, in the middle of the campaign.
Because one forecast can now be made with absolute confidence: the Reserve Bank will not lift the cash rate when its board meets next week.
"This was a remarkably low number," said Westpac's chief economist Bill Evans, who was forecasting a rate rise next week prior to the inflation numbers.
"The core number which the Reserve Bank relies on for its policy decisions printed 0.5 [per cent]; our forecast was 0.9 [per cent]. I think 0.9 would have delivered a rate hike; on 0.5 we can absolutely be confident that there'll be no change in rates next week."
Despite the forecasting failures, Rory Robertson says that, for the pundits, the inflation figure was a good outcome.
"Economists wanted a big one where a rate hike was sure, or a little one where rate hike was not happening. A 0.8 would have been a nightmare because many of us would have spent the next week umming and ahing about whether there would be or wouldn't be a rate hike," he explained.
"With a 0.5 on the Reserve Bank's best measure of core inflation, there's no rate hike next week. In fact it looks like the Reserve Bank will be on hold for the next three months at least, and I'm guessing the Reserve Bank will be on hold at 4.5 per cent into 2011."
The numbers will be no surprise to Gerry Harvey at Harvey Norman, or the bosses of Woolies and Coles. They reckon there's a price war underway to get customers in the door and spending.
The inflation reading also confirms that the interest rate rises delivered so far by the Reserve Bank and the retail banks are biting and that despite the low unemployment rate, parts of the economy are still in pain.
"The household sector right now is dealing with the biggest uplift in mortgage rates in at least two decades in that the shift in mortgage rates of 1.6 percentage points, to about 6.75 per cent, is in fact the sharpest lift in mortgage rates in two decades," Rory Robertson explained.
"So I think it's increasingly clear that that is having the desired dampening effect on the household demand where basically consumption growth is sluggish, home building, local government building approvals have peaked.
"It's clear that the up trend in home prices has completely stalled. Also it's clear, and you can see that in the prices day to day, that the tourism sector in Australia is on its knees. We know the economy is strong on average but much of the strength is via the resources sector. Lots of other parts of the economy are sluggish at best"
And you don't need any powers of divination to see that.
Copyright: arcticle: Stephen Long, ABC News
Original article from: http://www.abc.net.au/news/stories/2010/07/29/2967360.htm
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