During the boom, Treasury got into the habit of holding back its economic parameter forecasts in a vain attempt to restrain the politicians’ spending.
At least that’s the way it seemed, since the forecasts were always wrong — that is, too low. The alternative explanation is that Treasury economists are no good at forecasting, which is possible but unlikely.
Now the usual imperative to restrain desperate politicians, still as great as ever, is tempered by a need to be careful not to depress everyone.
The IMF, which feels no such requirement and in fact apparently wants to scare the pants off the world, has predicted a 1.3% contraction for Australia this year; the Reserve Bank is at minus 1%; leaks suggest today’s budget will forecast a relatively non-depressing 0.5% drop in GDP this year.
This a pretty wide range, but if I had to choose one to go with, it would be the RBA, largely because it’s in the middle.
The trouble with Treasury’s forecasts is that they cascade through its models into projections of budget deficits and/or money available to be spent; if Treasury used the RBA forecast or, God forbid, the IMF one, then today’s budget would have to be much more stringent than it already will be to avoid a credit rating downgrade and, potentially, a run on the currency.
But none of the forecasts are worth much, even though a contraction in GDP this year of 0.5-1% seems reasonable enough. Just bear in mind that last year’s forecast of 2.75% growth in 2008-09 and 3% in 2009-10 seemed reasonable then too.
The difference between this budget and last year’s is that few people realised then how fragile the outlook was, and how uncertain the business of economic forecasting was. This year there is no such excuse: the outlook is now as difficult as it has ever been, but this time we know it.
Meanwhile the global sharemarket has rallied 40% on the basis of green shoots, but investors who have jumped into this lately are risking disaster. Bear rallies like this can be absolutely merciless on latecomers, even though there are signs of an improvement in economic conditions.
The rally is too early and Treasury would be wise to ignore it. The world has had a “sugar hit” from dramatic monetary and fiscal policy actions and is likely to experience a V-shaped recovery in response to that — especially China.
But China remains an export-based economy and although a colossal amount of government-funded infrastructure spending is boosting activity in the short term, the project of refocusing output on domestic consumption rather than exports is a very long term one.
Last night China’s April CPI showed the eighth month of falling prices — a 1.5% fall in headline inflation due to a collapse in pork prices because of swine flu, and a 0.2% fall in core CPI.
It would be wrong to suggest China is in the pernicious grip of deflation: there was a spike in prices last year, with which this year’s are being compared, and China’s banks, all owned by the government, are pumping cash into the economy at a furious rate.
But there are deep structural problems in the Chinese economy, just as there are in Europe and Japan.
This is no longer simply an American crisis, and it is not over. The collapse of the US banking system has exposed various deep flaws in many countries’ economies, which will play out over years.
Our flaw is an old one, well known: too great a dependence on the easy profits from bulk exports. That will be on display again in today’s budget.