When economic forecasting makes astrology look respectable

Andrew Pegler on February 09, 2010

Despite the “smart” money plunging, hurtling, even careering behind a rate hike all week the RBA board has gone against the script and in doing so has proved every economist surveyed wrong. Perhaps John Kenneth Galbraith was right when he said “the purpose of economic forecasting is to make astrology look respectable”.

Yes folks, as the shock of the no reverberated around the nation we all breathed a sigh of relief. Nearly all the pundits, however, except me (see my predictions for the year from a few blogs ago), who swore blind we were going to get at least a .25% hike, ran for the door. In fact a hike had been so well anticipated that bookmaker Centrebet refused to take any more bets on a rise declaring that “there was not a snow ball’s hope in hades of interest rates staying put”. It’s currently snowing in hell.

Basically our market economists got carried away by alluring data that showed strong growth in China, house prices going through the roof, inflation getting sticky, and unemployment declining sharply.

But the herd was feeding in the wrong paddock. It was chewing the wrong data cud because over the hill the clouds were still gathering in threats. For starters, information on the impact of the three rate rises remains limited. Plus banks putting up their home loan rates a full percentage point above the RBA cash rate put rates in the “normal range” allowing the RBA to build this into its strategy. On the global front the Chinese plans to wind back stimulus will impact negatively on our export earning. This has obvious implications for us. Plus, as I have written here before, there are grave concerns about what’s called sovereign debt, which basically means what each country owes after the global stimulus splurge. And there’s also the uncertainty of what will happen here as the stimulus starts to be wound back. Finally, inflation, the main driver of interest rates, is still not a big drama here.

But here’s a tip for the indebted – don’t get complacent because as long as the economy keeps on its current trajectory then these record low rates will have to move up. I will put myself out on a limb here and predict there will be two or three more rate rises this year totalling .50 to .75%. As for those economists, well don’t believe everything you read, err… except maybe the stuff that I write?

And in other news… according to credible independent number crunching out of the US, unless we see a Miracle on 54th Street the US will have virtually no room for new domestic initiatives. This raises the spectre of that very important country suffering the same problem Japan has had over the past decade or so. As debt grew more rapidly than income, Japanese influence around the world declined. The rise of China anyone?