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Co-founder & CEO of AllenWargent property market & hedge fund advisory.
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Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.
4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.
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Monday, 12 November 2012
Great RBA paper on the uncertainty of its own forecasts
It often makes me chuckle when I hear financial commentators making detailed and specific forecasts.
"The economy will be slow until mid 2024, when it will start improve..." or "I foresee no movement in property prices in your suburb for 30 months, when there will be an upturn..."
The Reserve Bank today released a very interesting paper about its own ability to make acurate forecasts. It's interesting to note that even our own central bank understands that its ability to forecast unemployment a year from now is no better than an out-an-out guess.
It's also interesting that the RBA recognises that even making a longer-term prediction of some variables does not improve the level of certainty.
So next time you hear a specific forecast from someone on Australia's GDP growth for the next year, ask them about what level of certainty they can give you on their prediction, even to within one entire percentage point.
If the expert claims to be certain, then you can be certain they aren't an expert! The same applies for forecasting next year's unemployment rate.
Here are the RBA's key conclusions:
"-Uncertainty about the forecasts is high. Confidence intervals span a wide range of outcomes.
-RBA one-year-ahead forecasts have substantial explanatory power for both the level and change in inflation. This contrasts with the experience of some foreign central banks.
-However, deviations of underlying inflation from the target at longer horizons are not predictable. This is a desirable feature of an inflation-targeting framework.
-Underlying inflation is more predictable than headline CPI.
-Forecasting economic activity is more difficult. As has been found for many forecasters overseas, the RBA’s forecasts of GDP growth lack explanatory power.
-Forecasts of the unemployment rate outperform a random walk only for a few quarters ahead.
-Relative to private sector forecasts, RBA forecasts of inflation have been marginally more accurate while forecasts of GDP growth have been less accurate. The differences are small.
-Uncertainty about some key variables does not increase with the forecast horizon. We know about as much about economic growth in the current quarter as we do about growth two years ahead."