Glenn Stevens just gave a great economic speech but we can ignore it as the message is: forecasts aren't any good

Photo: Julia Vynokurova/ Getty.

For the second week in a row a senior RBA official has decried the markets’ focus on point forecasts while also pointing out that they are, more often than not, wrong.

Last week it was Alexandra Heath, the RBA’s head of the economic analysis department, telling an audience that forecasts should be taken with a grain of salt. Tonight it was none other than RBA Governor Glenn Stevens singing the same song.

Stevens wasn’t being disingenuous, or saying it was too hard. Rather, like Ben Broadbent Bank of England Deputy Governor recently, he was decrying financial market traders and economists hanging too closely on central bank forecasts.

Stevens said the bank had been adjusting its forecasts for the economy as the picture evolved and changed but highlighted that there “is little numerical precision that can be attached to these rather qualitative views”.

Rather he says the bank is trying to get markets to understand that the outlook is “probabilistic.” That is the bank is making forecasts in uncertainty and so some variations to expected outcomes would be usual.

Here’s how Stevens explained the process:

The ‘central forecast’ is simply the modal point of a distribution of possible outcomes. It is more likely, in our judgement, than any other single outcome, but the likelihood of that particular outcome is in fact not that high at all. We have tried to convey this sense of imprecision by publishing ‘fan charts’ and by putting ranges in tables for forecast variables over horizons longer than a couple of quarters. The point of this is to try to get people to focus less on the central number and more on the set of issues that accompany the forecasts.

He clearly laments that the banks battle with faux precision, or the markets expectation of an ability to be precise from the central bank has “not been very successful.”

Having said that though he did take a stab at what he thought might be “the ‘big forces’ at work over the next decade”.

Here are the highlights:

  • China will grow more slowly on average than in the past decade, but it will still be a big deal given its overall size and the extent of transition required in its growth strategy. China’s financial weight will be increasingly apparent in markets.
  • The United States will still be a very large economy and, perhaps more important, still a leading source of innovation and dynamism. It will probably retain its current position of global leadership in international economic governance, though much depends on how two political establishments – the US’s and China’s – behave, including towards each other.
  • The share of services in most economies will continue to increase. Health and aged care are obvious areas for expansion – another effect of demographics.
  • ‘Digital disruption’ will continue. Some of this will be faddish and no great aid to productivity. But other elements will mean fundamental changes to business models.
  • The already-considerable resources devoted to IT security will grow further as awareness increases of cyber risk and its consequences. Maybe IT security will need to get as inconvenient as airport security and more costly – a whole new meaning of the term ‘digital disruption’.
  • Global interest rates are still going to be very low for a good part of the decade ahead… In a low interest rate world, the problems of providing retirement incomes will become ever more prominent.
  • The business cycle will continue. There will be economic downturns from time to time. If one of those turns out to be a big one, it will be very new experience for quite a lot of Australians.

In the end though he finished where he began.

“Human nature won’t change. That means that we, as human beings, will be irresistibly drawn to those who claim to be able to forecast the future, beat the market, and give us the illusion of certainty and control,” he said.

Take that, market forecasters.

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