Australian recession predictions gone wrong

Charlie Nelson
October 2010

In Australia, several recessions have been predicted in the last fifteen years but we have not suffered one.

Speaking in late 1997, Peter Brain, director of the National Institute of Economic and Social Research suggested that Asia’s economic troubles will last for three to five years and that Australia would also slide into recession, with unemployment rising above 10 per cent.  The former economist with National Mutual Funds Management, David Corby, expected the problems in Asia to spread to a global recession in the worst crisis since the Great Depression of the 1930’s.  These predictions were printed in the Australian Financial Review in 1997 and 1998.  Australia’s economy boomed throughout the late 1990’s, averaging well over 4% annual growth.

"Just when it seemed to be blue skies for the economy, the high-tech soothsayer who charges big business $7,000 an hour for his services is forecasting disaster - and soon.  But what makes Phillip Ruthven so sure?" Good Weekend (The Age Magazine) September 3 1994.   Big business is entitled to a refund!  In that article, Ruthven predicted a great depression in Australia in the 1990's, complete with dole queues.  The reality was just a little different.  GDP growth in Australia has powered ahead, averaging 4%, well above long term trend, since 1994 and has never gone into recession (two successive quarters of negative growth).  So how did Ruthven make such a bad forecast and what can we learn from this mistake?  "Everything is cyclical," Ruthven says.  "Straight lines do not exist.  Some of the cycles are short - the major underlying economic cycle in Australia lasts about 38 years - while others are as long as 150 years or more.  The trick is to know the amplitude, length and variation of the cycles and, more importantly, to be able to explain the reasons and causes for such behaviour."  The lesson is that if you only look for cycles, you will only find cycles.  The idea that there are cycles of 150 years or more is ludicrous given that one would need to observe several such cycles before one could be confident in them.  National accounts data for 300 years does not exist in Australia and the country has only existed since 1901.

“Australia is now in a recession that will cut its living standards by about 4% over 2009 and 2010 as the world goes through its worst slump for 75 years, the International Monetary Fund has predicted”.  The Age, April 23 2009, page 1.  GDP was predicted to contract by 1.4% in 2009.  Instead, it grew by 1.2%.  A slowdown, yes – but there was no recession.  GDP growth in 2010 is likely to top 3%.  Unemployment was predicted to rise to over 8%, but it never breached 6%!

Many economic forecasters incorrectly predicted a recession in the face of the Asian economic crisis of the late 1990’s.  Most predicted a recession when the global financial crisis emerged.  That so many can get it so wrong is disturbing and is evidence of group think.  Business decision makers and investors should question the logic and assumptions underpinning economic forecasts before depending on them.  Look for dissenting forecasts and evaluate them as critically as mainstream forecasts.

 

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