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Last year's best forecasters

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by Peter Switzer

At the end of last year, the people over at CommSec did a very bad and dangerous thing— they evaluated the accuracy of economic forecasters. And they actually named the country’s best forecasters for 2009.

You might not be surprised that CommSec, a part of the CBA team finished in the top five and while it could look a bit gratuitous I have to say these guys have had a good year with the crystal ball.

In fact, regular readers would recall that I have had a good year on the economic punt and in part it was because I relied pretty heavily on the calls from CommSec’s chief economist — Craig James.

Three reasons Switzer was positive

Of course, as one of the few optimists in the early months of 2009, I guess I was shopping for an economist whose calculator and computer was spitting out the kinds of forecasts I wanted to believe in, but there was also a bit of method in my apparent madness.

Firstly, I believed the economic stimulus would work. The government spending was targeted at people who would spend, and even though some were going to save it, those people would, eventually, spend some of it.

Secondly, I always thought the doomsday merchants who bagged China were going to be proved wrong. The Chinese were the first to pump up their economy with US$586 billion worth of stimulus spending. Also, most Chinese are not in debt and aren’t constrained by a life lived on those fantastic plastic credit cards.

The stimulus was meant to fill in for the lack of export income that China was bound to miss because of the global recession.

Thirdly, the massive interest rate cuts — 4.25 per cent — in a very short period of time was always going to pump up a bruised and battered economy. It had to work and it did, explaining why we dodged a technical recession. Those cuts instantly gave lots of Australians both a confidence shot in the arm and a big boost in potential spending power.

Finally, I thought world governments got their economic recovery programs right at long last and the injection of demand from all of these big spenders had to have a significant impact on demand and production. Ultimately, this had to show up in the stock market. This in turn would feed into confidence — both consumer and business — and we would be off to the races!

Fortunately, 2009 followed the script and we can only keep our fingers crossed for this year.

The famous five

And this is a nice link to CommSec’s findings on our best forecasters. Their research shows that the five forecasters that were consistently close to the mark over the year were UBS, Westpac, 4Cast, the consensus — that is, an average of all forecasts — and CBA.

James says he has found that a good way for investors to stay on top of the economic forecasts is to follow the consensus.

This is an average of the 20 forecasters’ views on the economy and various indicators of it and these consensus views consistently outperformed the majority of individual forecasters over differing time periods in 2009.

Good pickings

Of the 106 indicators tracked, the consensus economic forecast picked the direction of movement 80 per cent of the time. And on 55 per cent of occasions, the consensus result was amongst the top forecasts.

When it came to unemployment in Australia, the economists were largely wrong. Most economists saw unemployment heading to eight per cent plus and many were very critical of the Federal Treasurer Wayne Swan when he tipped unemployment would peak at 8.5 per cent in 2010.

Many thought nine per cent was the more likely number and there were those who were putting their money on 10 per cent.

Craig James went for a peak in unemployment around 6.2 per cent early in 2009, and he pushed it up a bit later, but he was the most accurate of the banking economists.

He was also one of the few who suggested, like me, that we could — just — avoid a technical recession.

Ignore the forecasters?

So, given that forecasts aren’t as accurate as you would like, should you ignore them in 2010?

The smart answer is no. I agree the consensus view is worth noting and is good for direction but sometimes you have to see who really has the best indicators that underlie the forecasts.

“Forecasts are helpful as a point of reference to determine whether the latest economic data results are ‘strong’ or ‘weak’,” James says.

He says when the focus was on the September quarter GDP figures at the end of last year, for example, surveyed economists expected the economy to grow by 0.4 per cent.

“The actual result was a rise of 0.2 per cent. The outcome was interpreted as a slightly ‘worse-than-expected’ or weak result, and the Aussie dollar fell more than half a cent against the greenback in response.”

It’s a gamble

Basically, I selected CBA’s forecasts because I reckoned they had a pretty good window of the Aussie economy with their business and home loan clients. They coincided with my gut feelings and anecdotal evidence that the economy and the market was about to turn positive in early 2009.

The bottom line is that forecasting is a bit like gambling on the horses. The expert tipsters don’t always get it right but they get it right more times than the mug punter.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, January 12, 2010