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All “credible” economic forecasters got it wrong

In May 2009, the Australian Treasury predicted that GDP growth in 2009/10 would be minus 0.5%.  In other words, Australia would be in recession.  The Reserve Bank of Australia had a similar forecast, as did most private sector forecasters.

But GDP growth in 2009/10 turned out to be plus 3.3%!  How could they all have been so wrong?

By March 2010, the Australian Financial Review (AFR) published an article, written by Geoff Winestock (11 March, page 61) asking why only a handful of economists got it right.  Both the head of Treasury and an Assistant Governor of the Reserve Bank (Phil Lowe) said that any forecasts more optimistic than theirs would not have been credible.

Despite a complete loss of credibility, Phil Lowe said that being far too pessimistic does not justify a wholesale revision of economic forecasting!

As I predicted in April 2009, before Treasury’s pessimistic forecast was published, that the worst was already over I felt motivated to write to Winestock at the AFR.


11 March 2010

Geoff Winestock
Australian Financial Review

Dear Geoff 

You article: Numbers don’t stack up


Your article is very interesting and thought provoking.

As it happens, there was someone else who predicted quite early that Australia would not go into recession – me.  On 30 April 2009, The Age published an article by Harold Mitchell which said that the worst was behind us because Charlie Nelson had told him so.  A copy of this article is attached,

This was published before the pessimistic May 2009 federal budget.  I wrote to both the Secretary of the Treasury and the Governor of the Reserve Bank to advise them of this but received no reply.  Perhaps, as indicated by Phil Lowe in your article, they did not find this credible.

You will note from Harold Mitchell’s article that we also thought in 2007 that it was likely there would be a slowdown in late 2008 and early 2009.  This was a scenario based on three events which we thought could occur at the same time in late 2008: 

  1. A slowdown in consumer spending resulting from rising interest rates was likely as interest payments were at a record proportion of household disposable income and further interest rate rises were likely because inflation was rising too quickly.
  2. While we did not know the full impact of the emerging sub-prime crisis in the USA, we knew that if the impact was severe, it could slow China’s exports to the USA and hence our exports to China could be slowed.
  3. We thought it likely that there would be a post-Olympics slowdown in China as the huge construction of apartments, hotels, office buildings, and transport infrastructure came to a shuddering halt for a period of time, and that this could slow our exports.

While my analysis never indicated that Australia would go into a severe recession, it was clear by late 2008 that there would be a slowdown.  There is no doubt that interest rates were hiked too high in 2008, but prompt fiscal and monetary action removed the risk of a recession.  It was evident by April 2009 that enough had been done.

Two very important issues jump out from your article.

The first is prompted by Ken Henry’s statement “All credible forecasters are expecting the economy to continue to operate below its productive capacity in the next year or two”.  All “credible” forecasters were clearly wrong.  It is important to consider the views of forecasters which may not be considered by some to be credible.  That would be sensible risk management – reducing the risk of “group think”.  Diversity, as in investment, is vital.

The second is the doubtful value of economic forecasts as a basis for planning.  It would be more prudent to use scenarios – a range of plausible outcomes – as a basis for planning.  The result would be plans which were more robust in the face of uncertainty and which could more quickly adapt to the unexpected.

If you are interested, I would be prepared to show you the key consumer tracking surveys which indicated in April 2009 that the worst was clearly over.




Charlie Nelson

It will not surprise the reader that my letter to Winestock was greeted by the same response that I received from my letters to Treasury and the Reserve Bank a year earlier – no response.

In the view of Treasury and the Reserve Bank, all “credible” forecasters (including themselves, presumably) got it wrong.  It is time they listened to some incredible forecasters!


Charlie Nelson
September 2010