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The unbelievable economy ahead

In case you missed it, economics in the real world of governments, banks and businesses is a guessing game. We know that because most of the experts we turn to for guidance get it so wrong so consistently, it’s amazing that we treat them with any respect, let alone credibility.

Let’s look at the performance of Treasury in only May this year. Back then they thought 2011-12 would produce growth of four per cent but now have cut this back to 3.25 per cent. When they do this a few commentators cry out: “What in the fig happened there?”

These guys and girls are supposed to be the expert economic eggheads advising poor old Federal Treasurer, Wayne Swan, and their miscalculations make him look like a dud. They should be some of the best economic minds in the country and that’s why we look to their forecasts. So when they make big changes to their predictions we should be able to ask: “What happened there?”

By the way, the experts at the Reserve Bank have also got their predictions wrong for growth, unemployment and even the terms of trade. They even got the all-important inflation forecasts wrong, which collectively kept them with interest rates too high.

Forecast doubts

From the May budget, I doubted their forecasts on the local economy, pondered their apparent optimism about Europe and even pointed to the fact that US double dip recession warnings were on the rise.

In May, I expressed doubts about their figuring as they seemed too comfortable with Europe’s woes but by August when the stock market dropped like a sack of potatoes, both Treasury and the RBA should have been rewriting their numbers. Instead it took until November for the Big Bank to cut its official interest rate and it took until this week for Treasury to opt for a B-Plan after its projected deficit for this financial year went from $22.6 billion to $37.1 billion!

The mistake rate by these key players in both fiscal and monetary policy is a big worry. I can only hope they turn their mistake rate around.

Two developments

If we can believe Treasury, we’re expected to grow at 3.25 per cent but this must rest on two important developments — none of which we can confidently rely on.

First, the European Union has to come up with a credible plan for beating the sovereign debt challenges, which in turn will stabilise European banks. If the procrastinators of Europe get this right, the stock market will take off and that will help business as well as consumer confidence, which in turn will help economic growth.

The predicted growth number is good enough to lower unemployment or keep it stable around 5.5 per cent. We are now at 5.2 per cent and so some 30,000 Aussies could lose their jobs over the year if the Government’s numbers are right.

However, if Treasury is again too optimistic, then more of us might lose work.

Second, the RBA will need to give at least two more rate cuts to boost our interest in giving up our new ways of saving and avoiding credit. Until we start to borrow and buy again, this economy — minus mining — will remain sluggish. That will not be good for jobs, profits and property.

Australian Bureau of Statistics data shows values in our capital cities fell 1.2 per cent in the past quarter and that’s the most in a year. They are now 2.2 per cent below the level they were in September last year. Sydney was the best performer dropping 0.2 per cent for the quarter, while Melbourne dropped 1.7 per cent. Meanwhile Brisbane and Perth — the gun mining states — fell 2.5 per cent and 1.3 per cent, respectively.

Risky bet

This story won’t get better with unemployment rising and interest rates not falling. That’s why a December interest rate cut, maybe followed up by a European-inspired stock market rally, could set us up for a better than expected 2012, but who is prepared to put money on that?

At the moment, there are not enough players in the stock market and that’s why the Dow Jones had its worst Thanksgiving week since the Great Depression!

All of this raises doubts about whether we really need the Treasurer to move heaven and earth to arrive at a budget surplus by 2012-2013. Clearly he’s doing it for political credibility reasons but many economists doubt the economic good sense of coming at this stunt with the economy so vulnerable to a slowdown.

The only way this slashing on spending of $11.5 billion to create a $1.5 billion surplus will work by the end of 2012-13 is if the RBA says, “well done and so we’ll cut interest rates”.

What’s needed?

I think two more rate cuts will change attitudes to buying property and going into debt and when this happens we will grow faster, create jobs and this will help turn deficits into surpluses.

Wayne Swan is making an economic and political bet on both Glenn Stevens, the boss of the RBA, and the officials of the EU. That’s a huge gamble but I hope he collects for all of our sakes!

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

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, December 06, 2011

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