Government and business planners need accurate economic forecasts to make optimal decisions. Investors too need accurate economic forecasts as part of evaluating future company profits.
There are times when economic forecasts are quite accurate: this is usually when there is little variation from recent trends. There are also times when accuracy is very poor.
It would be valuable to be able to predict when economic forecasts can be relied upon and when they are likely to be inaccurate. This is important for risk management and appears to be possible, at least in Australia. There are circumstances when official forecasts are likely to be most inaccurate.
I have identified the conditions under which GDP forecasting inaccuracy is greatest. My report is available at foreseechange.com.au.
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.