The economy is hard enough to manage and forecast with the many thousands of inputs and factors that drive a fairly simple, somewhat benign equation:
GDP = Consumption + Investment + Government Spending + (Exports – Imports)
Consumption gets affected by the whims and behaviours of people, who regularly fail to act in accordance with what the models predict.
Investment – well, business managers – are human too, so sometimes they are hard to forecast. Particularly their reaction to unexpected events.
Forecasting government expenditures used to be easy but now we have governments with small debt problems saying they are huge, and politicians who in the past have appeared to be a steady pair of hands but are suddenly dropping the ball.
And finally we have net exports. Net exports require you to not only predict what is happening in your own economy but also the global economy, your trading partners, your currency, their currency.
It’s all very difficult.
But what sometimes can make it impossible to forecast an economy is the weather.
Take the US economy for example. The cold snap earlier this year was a once-in-a-100-year storm which saw economic activity slow.
But the weather was so bad even the statisticians couldn’t get it right with the benefit of hindsight.
The first read of US Q1 GDP said growth had been a minuscule but positive 0.1%. The second read, a month later and with more data, said the economy contracted 1.7% in Q1. But the third read, released last week and with even more data, showed that the US economy had in fact contracted 2.9% in the first three months of this year.
In Australia it seems the weather, although El Nino and warmer weather here not freezing cold and blinding snow storms, might be already having an impact on economic growth.
Today’s Australian retail sales were much weaker than expected and some of that is directly related to a fall in sales of clothes and shoes when seasonally adjusted.
So the warmer weather in May has cost growth already.
But what about the future?
some of the warm water flows back toward the east towards the Americas. The relocating warm water takes some of the rainfall with it which is why on average Australia will have a dry year.
That is likely to hit the agricultural sector and export volumes going forward, but prices overall should rise as well due to a shortage of product.
The key however in forecasting growth in the quarters ahead is that El Nino will hit some sectors hard – but in a consumption-based economy it is consumer sentiment that is the key.
So on that front with consumer confidence weak, the best of the mining investment boom past and the government cutting back, when we add in El Nino it looks like a rough seas ahead.