I should start by throwing the economists at Treasury and the Reserve Bank a bone.
They are always up against it on the forecasting front because they only make public forecasts four times a year.
Their numbers date quickly.
Market economists have the luxury of updating their outlook when events require it.
And events do require it.
Academic research suggests economic forecasts don’t have much validity once you get outside three months.
Accuracy deteriorates rapidly a year out, and at two years out, you might as well flip a coin.
On that basis, it is kind of bonkers that we plan our Government spending based on Treasury forecasts out to the year 2030.
But I get it, you’ve got to have a framework to work off.
Economic forecasts need to be looked at holistically and not as sports betting, ie one-off predictions that are right or wrong.
They are usually offered within a range of scenarios: best case, base (or central) case and worst case.
The base case should be the one the economist has the most faith in, but even then, they’ll nuance it by suggesting whether the risks of being wrong skew to the downside (worse than forecast) or upside (better than forecast).
Let me forecast how the Warriors are going to go against NRL leaders Penrith tonight.
Penrith are very good, and it is an away game, so my base case is for the Warriors to lose by a narrow margin.
My best-case scenario is that the Warriors win by a narrow margin. They are in good form and, weirdly, they often handle big game pressure better away from home.
The worst case is that Penrith run rampant and it blows out to a big loss for the Warriors.
One of the only solid conclusions you can reach from my forecasts is that the odds of a blowout win for the Warriors are low.
They’ll sneak home, or they lose by either a little or a lot.
That’s a solid bet. But it isn’t rocket science either. If I took it to the TAB, I don’t think the payout would be great.
There is still some chance the Warriors will play a blinder and Penrith (with their big stars knackered from the State of Origin) fall to pieces and concede a big score.
Predicting how the Warriors will fare can be as tricky as forecasting what will happen with the economy. Photo / Photosport
I might update my forecast at halftime. I like my odds better from there.
Now consider the fact that Treasury effectively makes its call about the Warriors v Penrith match before the NRL season even starts.
On that basis, we probably shouldn’t worry too much about whether its outlook is too optimistic or too pessimistic. As usual, the Government will adapt as the numbers change.
But it does seem, however you cut it, Treasury’s base case forecasts are the most optimistic of the pack.
Their big calls for 2026 have inflation peaking at 4% this quarter, but falling quickly back to 1.6% in June 2027.
Unemployment peaks at 5.5% this quarter before falling slowly (5% in June 2027).
GDP is a miserable 1.2% for the year to June 30. But it bounces to 2.3% in the year to June 2027.
It even reaches 3.2% in the year to June 2028, which sounds good but, as mentioned above, is predicated on variables no one can predict.
The RBNZ is picking inflation to be 4.2% this quarter (peaking at 4.3% in September).
It is not as optimistic about GDP picking back up and suggests 1.7% for the year to March 2028.
All the major banks predict inflation going higher than Treasury does, but to be fair, everybody sees it going up.
All the forecasts assume there is a resolution to the Iran conflict and the direct oil price supply shock is transitory.
That’s reasonable. They all point out the downside risk if there is no resolution.
I think the world is starting to adjust regardless.
Today marks three months from the start of the conflict.
The Strait of Hormuz is still closed but the worst has not happened – petrol hasn’t run out, oil prices haven’t hit US$150 ($250) or US$200 a barrel as some feared.
In fact, I don’t think we should be calling it a crisis any more.
There are no guarantees in that region, whatever deal gets signed. We just have to live with it.
Where the debate opens up among local economists is on the extent to which secondary inflation might get embedded in the economy and therefore require higher interest rates.
The higher interest rates have to go to deal with inflation, the more subdued the bounce-back is likely to be.
The bad news is the only thing that might prevent the RBNZ hiking rates is the economy being so bad in the first place that secondary inflation can’t take hold. It’s a lose-lose scenario.
The good news is that almost everyone sees a recovery coming back into view later this year.
It makes sense that there is pent-up demand in the economy. Export boom money is flowing through. People just need to feel confident enough to start spending again.
Bank economists are picking second quarter GDP will show the economy contracted; no one is picking a recession (ie another contraction in the September quarter).
Given we are now two-thirds of the way through the second quarter, it is reasonable to assume we are now soaking in the worst of the Iran war slump.
On Friday, ANZ Consumer Confidence and ANZ Business Outlook both showed optimism about the future has started to rise again.
Interest rates will likely rise a bit; the cost-of-living crisis isn’t going anywhere fast, but those green shoots of recovery might not be far away.
And the Warriors might win the NRL Premiership. It’s our year. C’mon!
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
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