Economic forecasting is a much-mocked exercise at the best of times, and 2020 was not the best of times. Australia’s 7.0% drop in GDP in the June quarter and New Zealand’s even larger 12.2% setback were an order of magnitude larger than anything experienced before.

Quarterly data from the Australian Bureau of Statistics (ABS) goes back to 1959, and in that time the next nearest drop in GDP was 2% in June 1974 during the first OPEC crisis. The Stats NZ figures go back to 1986, and the pre-COVID worst had been a 3.1% decline (the December 1986 quarter, as spending dropped back from a big “buy it before the GST comes in” splurge).

Previous economic forecasts that the Australian economy might grow by 2 point something or New Zealand’s by 3 point something were more than usually stranded by events last year.

It’s the big picture that’s important

With yet another set of forecasts filed in the bin, you’d be forgiven for wondering if they’re ever up to much. But I’d resist that temptation, for two reasons.

One reason is that despite the forecasters’ own agonising over nudging their predictions of GDP or inflation by fractions of a percent, the honest reality is that the exact numbers don’t really matter. What’s of value for many businesses is the big picture story.

“The honest reality is that the exact numbers don’t really matter. What’s of value for many businesses is the big picture story.”

Economists, for all their flaws, are quite good at telling a consistent tale. The best ones are remarkably well informed. They spend a lot of time out of the office talking and listening to industry groups, visiting clients, and chewing the fat with the journos and the pollies.

Their economics toolkit is well adapted to assembling all this feedback into a coherent narrative: “that bit over there affects this bit over here” is how they’re trained to look at the world.

The second is that the worth of a forecast is not whether the numbers play out exactly as the forecaster expected: it’s whether the forecast led you to make the right business decisions.

A classic example is exchange rate forecasting. If you like to take on forex risk, then the forecaster’s exact predictions are neither here nor there. They could be miles off, but nonetheless they may make you money by guiding you to the correct “hedge or not hedge” decision.

Similarly, the economist who tells you we’re near the bottom of the bad times, or we’re getting into frothy markets nearing a peak, could be well off the mark in timing the turn, but it would still be valuable strategic advice.

GDP growth, quarter on quarter

Click to enlarge image.

Waiting for the reality check

COVID-19 will still be front and centre of the outlook for some time, and could well throw off this year’s forecasts as badly as it did last year’s.

Sensibly, many central banks and Treasuries are running with sets of scenarios for 2021 rather than any strongly held central view. But if I were pressed to hazard my single best guess at what’s in store for the year ahead, I’d call it “waiting for the other shoe to drop”.

It’s true that the immediate bounce back from the pits of the June 2020 quarter has been stronger than originally expected, and the peaks of post-COVID unemployment now look less gloomy. And access to vaccines against coronavirus is not that far away.

That’s all fine. But despite the vaccine news, it looks as if significant border restrictions in Australia and New Zealand will still be in place at the end of this year.

That’s going to be tough for swathes of the tourism, hospitality and international education trades, their suppliers, and the wider economy as the ripple effect spreads out.

On both sides of the Tasman, we staved off the worst of the immediate hit with highly effective wage subsidies, but that’s not feasible longer term. So, with some trepidation, I’m leaning to the view that the first few quarters of 2021 could go well, but we can expect a reality check later in the year.

Easy credit rears its head, again

If I were to offer a second hostage to the forecasting gods, it would be around ultra-easy monetary policy. Yes, it was right to deploy in the crisis. But with credit so cheap, there are some strange things happening.

The most recent CoreLogic data shows that Australian house prices in the five big capital cities are up 3.99% on a year ago (units are up 2.47%), and the latest Real Estate Institute of New Zealand data shows a startling 13.5% rise in house prices in New Zealand – all this, in the throes of a pandemic.

Maybe forecasters, like generals, are always refighting the last war, and there isn’t another global financial crisis around every corner, but my second tip for 2021 would be to be careful about overvalued assets and easy credit.

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