Forecast cloudy as RBA attempts to gaze into the future

Why does the RBA even bother making forecasts in its latest quarterly monetary policy statement when everything carries an invisible asterisk that assumes there will be no ‘surprises’?

RBA governor Philip Lowe. Picture: Arsineh Houspian

Seriously, why do they bother? Making forecasts of the future, that is?

The Reserve Bank’s quarterly monetary policy statement came out on Friday. All but the weirdest economist would go straight to the one-page appendix, which laid out the RBA’s forecasts of the major economic variables at six-month June/December data points through to December 2024.

Taken as a whole, they painted a reassuring picture of the economy sailing – and, implicitly, being “guided” by the wise heads at the top of Martin Place, Sydney and in the Treasury ivory tower, sorry, building, in Canberra – serenely through the next 28 months to ­arrive at a very good place at the end of 2024.

By then inflation would be back down to an unthreatening 3 per cent and wages, after finally getting ahead of inflation over the 2023 year, would be rising strongly by the end of 2024. The RBA forecasts a near 5 per cent rise in the nominal wage paid per hour.

Yes, growth in the economy would slow, to just under 2 per cent in both 2023 and 2024. But it would still be positive all the way through; and critically, we’d get jobs growth along the way and the jobless rate would only kick up to a still very acceptable 4 per cent.

Yes, interest rates would have gone up further from where we are after Tuesday. The RBA notes that its forecasts are based on rates moving broadly in line with a mix of two things.

The first is surveys of “professional economists” forecasts of what it, the RBA, is going to do to its official rate.

The second is “financial market pricing” – that is, essentially, the commonwealth bond yield curve as it is at a point in time.

Hmmm. Just take a moment to think about that.

The whole RBA structure of economic forecasts pivots on forecasts of what the RBA is going to do with its own official interest rate.

But it’s not the RBA’s own forecast of what it might do with its rate, but the second guesses of “professional economists”, trying to second guess what the RBA might do! Along with the similar second guessing, and just at a ­moment in time, of traders in the bond market.

Gee, those professional economists have an impressive record of forecasting what the RBA will do; very definitely and continually, not. And it is on their dodgy forecasts – even more extraordinarily, of what the RBA itself will do – that the RBA pivots all its forecasts.

How did the RBA’s forecasts of, say, August last year turn out? Let me be gentle: abysmally wrong.

Last August the RBA forecast inflation would be down to just 1.5 per cent this June. As we know, it was 6.1 per cent.

Further, it’s now heading for 8 per cent. Last August the RBA saw inflation just creeping up, to only finally nudge above 2 per cent by December 2023.

Now it wants us to believe that inflation will get down to, but only to, 4.3 per cent at the end of 2023 – still double what it had forecast for that date a year ago.

And so on and on, I could go through all the other forecasts – growth, employment, the jobless rate, etc etc: all completely wrong about where we actually went in the year to this last June; and almost certainly way out of the ballpark on where we are now likely to go over the next year.

Ah, I can hear the wails rising above Martin Place, but we didn’t know and there was no way a year ago we could know, about Russia’s attack on Ukraine, and maybe also China’s Covid-zero policy, which have up-ended key aspects of both the global and local ­economies.

The RBA also couldn’t know it would be putting up rates this year, because the “professional economists” – taking RBA governor Philip Lowe at his word of “not ­before ’24” – were predicting no rate rises. And so, “no rate rises” was fed into the RBA computer.

There were a lot of things that the RBA should have known in counter, and which it clearly did not “know”.

But the main point is that this is all precisely my point: you can’t sensibly predict the future because of these “events, events, dear boy’’, as former British PM Harold Macmillan intoned.

All these forecasts, by definition, carry an invisible asterisk: they assume everything in the world continues as it is now; that there are no “surprises”.

That was always bordering on spurious; it is now utterly ludicrous as we have moved into a world of ever-rolling “surprises”.

They render utterly pointless, suitably embarrassing and inevitably wildly wrong, forecasts presented so precisely by the RBA and Treasury.

But even that “we couldn’t possibly have incorporated the unknowable future into our forecasts of, well, the future” only gets the RBA (and Treasury) so far.

Look at the May RBA forecasts, when it knew about all the “left field” events like Ukraine, China’s disruptions, Covid impacts on labour supply, and everything else.

So how did it go with them? In two words, not well.

In May the RBA forecast inflation for this June year of 5.5 per cent. The figure was 6.1 per cent. So on the surface, not too bad?

Well, when it made the forecast it knew from the ABS data that inflation had already added up to 4.2 per cent for the first nine months of 2021-22.

It was predicting inflation in the June quarter of just 1.3 per cent; the outcome was 1.8 per cent; and it made the prediction a month into the quarter.

Now true, that was not as bad as Treasury, which only a couple of weeks before the RBA made its May forecast actually forecast zero inflation in the June quarter.

I guess there’s some difference between living in a building in Sydney and an ivory tower in ­Canberra.

But I repeat: why do they bother? Why do we bother?