A year of shocking forecasting inaccuracy

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There have been huge forecasting errors in 2020.  While this year may be an extreme case, we are experiencing very poor accuracy about one year in ten.  Even in other years, forecasting accuracy can be poor.  How then should business and government plan?

Forecasts for the number of deaths attributable to COVID-19 were very pessimistic.

Australia’s Deputy Chief Medical Officer Paul Kelly said that the number of infections would be in the range 20% to 60% of the population.  Deaths would range from 50,000 to 150,000 (The Age 17 March 2020).

Australian economist Warwick McKibbin  estimated that almost 100,000 Australians could die from COVID-19 (the range is 21,000 to 96,000).  This is based on modelling seven different scenarios, building on the experience of the SARS outbreak in 2003 and Spanish Flu in 1918 (Australian Financial Review, 3 March 2020).

As at 16 April, the number of deaths attributable to COVID-19 is 63 and the daily number of new deaths is declining.  The number of new confirmed cases is declining, despite increased testing.  On current trends, and assuming continued adherence to restrictions such as social distancing, there will be no active cases by the end of May.

The lowest of the predicted number of deaths, 21,000, is likely to be at least 210 times too high.  The highest of the predicted number of deaths, 150,000, is likely to be 1,500 times too high

These are dreadfully inaccurate forecasts.  They may not have allowed for how Australia would respond to the pandemic – if so, they should have stated this assumption (or the reporters should have asked about the assumptions).

Economic growth forecasts were not much better.

On February 6 2020, the Reserve Bank of Australia’s forecasts were for GDP growth of 2.75% and an unemployment rate of 5.0%.  The 90% confidence interval on their GDP growth forecast included +5%, but not 0% or lower!

A survey of economic forecasters by The Age, published on 1 February 2020, produced an average predicted GDP growth of 2.18% (range 1.0 to 3.3) and an average predicted unemployment rate of  5.23% (range  4.8 to 6.4).

On March 18, the governor of the Reserve Bank said “While it was not possible to provide an updated set of forecasts for the economy given the fluidity of the situation, it was likely that Australia would experience a very material contraction in economic activity, which would spread across the March and June quarters and potentially longer. The size of the fall in economic activity would depend on the extent of the social distancing requirements, and potential lockdowns, put in place to contain the virus”.

Australia will almost certainly be in recession and the unemployment rate is likely to exceed 10%.

We only have to think back to 2008 and 2009 for another example of very poor economic forecasting.  In 2008, the Reserve Bank was lifting interest rates until March, seemingly oblivious to the imminent global financial crisis.  By September 2008 they were cutting rates as fast as they could.  In May 2009, the federal budget predicted a recession.  So too did the Reserve Bank and 99% of economic forecasters.  The recession never arrived!

Economic forecasting seems to experience very bad economic forecasting errors at least once every decade.

With frequent large forecasting errors and an increasingly turbulent world, how can planners prepare for the future?

They could look at risk assessments, such as that produced by the World Economic Forum (WEF) at the start of each year – it is an assessment of long term risks.  At the start of 2020, the WEF Global Risks Report, prepared in partnership with Marsh & McLennan and Zurich Insurance Group, rated a set of 30 risks on the basis of impact and likelihood.  Infectious disease was rated 27th out of 30 on the likelihood scale and 9th on impact.  No doubt many planners would not include infectious disease at the centre of their plans.  The WEF most likely risk was extreme weather followed by climate action failure.  The highest rated risk in terms of impact was climate action failure.

Within weeks of the release of this report, an infectious disease has had devastating impacts on lives and economies with long term repercussions.  Events which are considered unlikely do happen!  Accordingly, there is a need for a well-rehearsed plan ready for implementation to minimise the impacts of such events.

Scenarios are a valuable input to developing robust plans in the face of uncertainty.  Scenarios are plausible futures, based on a range of assumptions.  While scenarios can map out an envelope of future possibilities, they also provide a basis for developing plans which are resilient across all plausible futures.

A frequent refrain from some business leaders is a call for certainty, especially from governments.  There is no such thing as certainty, as shown by the global financial crisis and the COVID-19 pandemic!  Even government policy must change in the face of uncertainty

Tracking surveys of Australian consumer expectations about the year ahead, conducted by foreseechange, showed that in November 2019 the average estimated likelihood of a major disease outbreak in the year ahead was 42% (the Wisdom of the Masses).  This is a perceived risk that people would expect governments to manage.  The Wisdom of the Masses also indicated economic downturn and a rise in unemployment.

The general public has information that is important in the development of scenarios.  The Wisdom of the Masses should complement information from experts in the development of scenarios.

Future posts will provide more information on scenarios and the Wisdom of the Masses.

Charlie Nelson



A change in the expectations and concerns of the Australian general public


There has been an abrupt shift in consumer psychology which has implications for government policy, the Reserve Bank, and business decision makers.  Economic pessimism has increased and the level of belief in climate change has lifted.

These changes seem to be at odds with the federal government’s “sticking to our policy” mantra.  The heightened expectation of a rise in unemployment is inconsistent with the Reserve Bank’s hope for a decline in the unemployment rate to 4.5%.  Other shifts in consumer psychology are more positive and provide an opportunity to boost consumer spending growth.

The level of belief in imminent climate change in late 2019 is the second-highest recorded and is slightly higher than in 2007, when John Howard lost his seat in parliament and his government lost office.

The federal government and many businesses need to take more decisive action on climate change to satisfy voter (and customer) expectations.

For several years, prominent Australian economist Ross Garnaut has warned of “the great Australian complacency” which has significantly slowed Australia’s economic growth rate.  That description clearly also applies to the issue of climate change.

As the new decade dawns, more Australians are experiencing the costs of these policy complacencies.

Our tracking survey update was in field in November and early December 2019.

A summary report is available at foreseechange.com.au.

Charlie Nelson


The collapse of the Australian consumer: a remedy


Symptoms of a collapse in consumer spending include four successive quarters of declining per capita retail sales volume, to the September 2019 quarter.  Declining new vehicle sales to private buyers for nearly two years to October provides confirmation of the breadth of the slump.

The recent cuts in interest rates, boosted personal income tax returns, and lower income tax rates have had no measurable impact on consumer spending so far.

Causes of this damaging slump are easily identified: low income growth and a fall in residential property prices.  There are, however, several causes of low income growth and these are identified in this report.

My report identifies the characteristics of those consumers who are most willing to spend.  These have been deserted by recent monetary and fiscal policy and should be the targets of immediate stimulus.  The forms this remedy should take are described and an implementation strategy is outlined.

My report uses proprietary consumer tracking data which measures consumer willingness to spend by demographic.

Industries exposed to consumer spending have an interest in understanding how to stimulate spending and recommending our strategy proposals to the Treasurer and the Governor of the Reserve Bank before they make any more mistakes.  Industries which would benefit include retailers and their suppliers, service industries, media companies, and media agencies.

My report is available at www.foreseechange.com.au


What will Australian consumers do with their tax cuts?

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Most will not be spent initially, only 25% to 30%.  This is based on modelling past data and tracking surveys, conducted since 2003 by foreseechange, of how consumers allocate discretionary funds.

More will be used for debt repayment.  When consumers repay debt, some may become more willing to spend subsequently.  But very low income growth in Australia will limit the ability to spend.

Even more will be used for saving.  Much of this is precautionary or for other long-term saving, such as retirement.  Quite a lot will be saved by young adults towards the purchase of residential property.

One of the main purposes for saving is for a holiday, mostly overseas.  Tax cuts put towards saving for a holiday will eventually be spent, but much of it will be spent overseas.

The overall impact on consumer spending may be just noticeable and may hold the economy up a little for the next 6 to 12 months.  Beyond then, we will be back to weak consumer spending growth and a weak economy unless we have policies to significantly boost productivity.

The glass may appear to be more than half-full for a short time, but the content will soon be consumed.

Details are available at foreseechange.com.au.

Charlie Nelson




How accurate are betting markets?

They were horribly wrong on the 2019 Australian federal election outcome.  Now I have come across an article from my files concerning Sportsbet’s odds on Australian interest rates in 2018.  This was not a good guide!

In the Australian Financial Review of 22 September 2017, Philip Baker noted that Sportsbet had two interest rate increases in 2018 as the $2.80 favourite, while just one increase was priced at $2.88.  No change was paying $3.60.  In fact, interest rates did not change in 2018 and the Reserve Bank cut interest rates in June 2019.

It is thought that betting markets are accurate because people with inside knowledge gamble and win from the great unwashed who also gamble.  But insiders are not always right!

More in my book “Forecasting: the essential skills

Charlie Nelson



Australia’s economy: official forecasts catch up with reality

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In my August 2018 post, I noted a suite of indicators that Australia’s economy was slowing significantly.  It is only in May 2019 that official forecasts have been revised downwards to reflect he long-evident facts.

The Reserve Bank of Australia have announced their downwards revision on the eve of Australia’s federal election on 18 May 2019.

Those who read my August 2018 post will have had plenty of time to prepare for this slowdown.

My latest report on Australia’s economic outlook is sobering, but essential, reading.

Charlie Nelson




The Wisdom of the Masses got it right on Australia’s economy

In November 2018, our wisdom of the masses tracking survey indicated an increase in the likelihood of a severe economic slowdown.  At that time the Reserve Bank of Australia was predicting 3.5% growth in 2019 and the federal government was nearly as optimistic.  The Reserve Bank lowered their forecast to 3% only in February 2019.


As of 6 March 2019, we know that the economy slowed significantly in the December 2018 quarter to be only 2.3% higher than a year earlier.  There is little comfort across a range of indicators that there will be any improvement in the March 2019 quarter.


On a quarter-to-quarter seasonally adjusted basis, Australia is now in a per capita economic recession for the first time since 2006.


Consumers are at the beating heart of the economy – both on the demand and supply sides.  If we want to know what is going on, we should track their views.  In aggregate, they will be more accurate than the experts!

See my wisdom of the masses expectations for 2019 for more information.

Charlie Nelson


The great Australian car crash of 2018

Peak car or perfect storm?


Since 1998 (when I was working at Nielsen) I have been forecasting new vehicle sales with a high degree of accuracy.  In 1998, I predicted sales of 770,000 to 820,000 when the industry was forecasting 720,000.  The outcome was 808,000.  This was reported in BRW on 26 January 1998.

Our models have been continuously improved but there are occasional surprises.  2018 was such a year.

I have now analysed sales and the causal factors for 2018 and identified a pair of factors which have had a larger negative impact than in the past.

Several other factors were influential to a lesser degree, but it was a perfect storm.  One factor may have a greater impact in 2019.

My report is available at foreseechange.com.au.

Charlie Nelson


Retail sales outlook for Australia

Retail sales growth in Australia has been very weak for several years.  There is little chance of improvement over the next 18 months.


All four main economic drivers are currently either not supporting growth or negatively impacting growth.  Consumer spending sentiment is quite good, but there is insufficient income growth for consumers to respond.

Then there is the imminent federal election – what impact will that have?

Scenarios for growth over the next 18 months are provided.

Retailers are facing challenges, but there is also opportunity.  The report is available from foreseechange.

Charlie Nelson


The arrival of black swan events suggest a weaker Australian economy

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Economic forecasts by the Reserve Bank of Australia and in the federal budget would have us believe that our economic growth rate is improving, from around 2.6% over the past five years to 3% plus over the next three years.  The run of data in July and especially August has cast doubt on this rosy outlook.

The first shock, received in the first few days of August, was that new vehicle sales fell by 7.8% in July, compared with July 2017.

Then there was the political shock.  On Monday August 20 the Fairfax-Ipsos poll reported that the ALP was ahead of the Coalition parties with a two party preferred lead of 55% to 45%.  By the end of the week Malcolm Turnbull had been deposed as Prime Minister.  Newspoll (38 of them) had put the ALP ahead but mostly with a lead of only two percent.

I had already noted in July that tracking data from foreseechange had shown that the proportion of adults who felt they had few financial concerns had dropped to a record low – and the data has been collected since 2003.  The figure was lower than at the worst of the GFC in late 2008, so this was a shock to me.

As more data has arrived, it has tended to confirm the hypothesis that was forming in my mind – Australia’s economic growth rate was not picking up as predicted by the official forecasters.  Instead the growth rate might actually be falling!

Last week, National Australia Bank released the June 2018 quarter survey of its consumer anxiety survey.  It showed a very large increase in anxiety compared with the March quarter.  The index is composed of several factors such as job security, cost of living, and ability to fund retirement.  The anxiety index had been falling for a year, so this too was a shock.

Today, data released by the ABS showed that private capital investment fell in the June quarter, against all expectations.  Another release showed that dwelling approvals, which peaked in June 2016, were falling after a sub-peak in late 2017.

Automotive fuel price inflation is up sharply with a big rise in the price of oil and a drop in the Australian dollar against the US dollar.  This is reducing consumer discretionary spending power, adding to the misery of continued very weak wages growth.

Employment growth has slowed sharply after the biggest boom in history in the year to January 2018.

Business confidence and conditions, to July, have been trending down since April.

The first week of September is a big one for economic data releases – July retail sales data and June quarter GDP data.

Stay tuned!

Charlie Nelson