Don't mistake economists for clairvoyants
By Garry Shilson-Josling, AAP Economist10 Feb 2009 5:46 PM
EDS: Reissues to fix literal in lead par
SYDNEY, Feb 10 AAP - As the global economy heads into a downturn of unknown severity, taking Australia down as well, it would be wise to avoid mistaking guesswork for clairvoyance.
Economic forecasting is an imperfect science at the best of times.
It's a lot like weather forecasting, but even meteorologists have several advantages over economists.
For one thing, at least the laws of nature are constant.
The air, the land, the sea and the sun all interact in the same way they always have.
A high pressure system or a cold front will have predictable effects.
But when a shock like a credit crunch or a share market collapse hits the economy it's a different matter.
Economic forecasting, in essence, is the art of making guesses about an economy might behave, based on observations of how it responded in similar circumstances in the past.
The problems come when the nature of the shock is without precedent in recent times and the circumstances have changed vastly since the last time anything resembling the current crisis occurred way back in the 1930s.
Just about every aspect of the Australian economy has changed since then - from technology and the composition of the nation's output to the industrial relations system and financial markets.
And the policy response to the slump in share and credit markets just sharpens the contrast.
The fiscal stimulus, the sharply lower exchange rate and the dramatic easing in monetary policy were not seen back then.
Even the existence of a genuine central bank this time is novel.
Accordingly, any forecast made now on the basis of the experience of the 1930s depression is fanciful.
The other big difference between weather forecasters and economists is that meteorologists actually know the current weather conditions.
They know the current wind speed and direction, cloud cover, humidity and temperature across much of the world virtually up to the minute.
Compare that to economists waiting for the national accounts, due on March 4, to tell them whether economic output expanded or contracted in the December quarter, a period that began five months ago.
Or at least give them an estimate of it.
The same figures will also tell them whether the estimate for the September quarter - growth in gross domestic product (GDP) of 0.1 per cent - was an overestimate.
If so, the economy could have been in recession, by the conventional definition of two consecutive quarters of declining GDP, since the middle of last year, long before it is confirmed by the statistics next month.
In a nutshell, economists aren't entirely sure where we are at the moment because the statistics are out of date and they don't know with certainty where we're going because the current crisis, and the policy response to it, has no modern precedent.
There is still room for educated guesswork, of course.
It could well be that the Reserve Bank of Australia (RBA), for example, is right in forecasting economic growth has stalled but not go into reverse as some more dire predictions say.
But no-one should pretend the RBA or anyone else, has a crystal ball at their disposal.
