The limitations of economic - and housing market - forecasts

There has always been a tendency to treat economic forecasting with more reverence than it perhaps deserves. When economists - especially RBA economists - make a call about the direction about where we’re likely to be headed, it can move financial markets, currency markets and, for our purposes, the housing market as well.?

But, as F.A. Hayek (one of the twentieth century’s most influential economists) himself once put it, “the curious task of economists is to demonstrate to men how little they really know about what they imagine they can design”.

There has probably been no greater example of this than when COVID-19 first struck in early 2020. In February 2020, immediately before the pandemic, the RBA forecast 12 months of moderate and steady GDP growth. It did note that the recent coronavirus outbreak in China created “near-term spill over effects to Australia” such as fewer international students and lower commodity prices. However, there was no way at all of forecasting the economic rollercoaster that 2020 (and seemingly now 2021) was to become.?

In May, in the midst of our first lockdown, the RBA forecast that GDP would contract by -10% and unemployment would rise to more than 10%. The central bank also forecast a prolonged decline in the housing market, or dwelling investment. The RBA’s forecast was supported by the economists at the Big Four banks, with the CBA predicting Australia’s median house price would plunge by up to -32% by the end of 2022 (although it suggested a figure of around -11% was more likely).?

Of course, none of this has happened, at least not to date. Far from tanking, both Australia’s economy and its housing market proved remarkably resilient in the face of the first wave of COVID-19. Thanks largely to our governments’ collective ability to contain and suppress the virus, Australia was one of the few developed countries in which GDP actually grew last financial year. Meanwhile, the housing market registered only modest falls in mid-to-late 2020. Then, in the first half of 2021, it went on one of the most dramatic surges it has ever recorded, lifting 12.2% in just six months.

Now we are in the midst of lockdowns once again, although this time things are different on many levels. We know more about what to expect, we have first-hand experience of the importance of targeted government support in helping businesses and individuals stay afloat, and we have seen how an economy can snap back once things return to normal. But we are also perhaps more frustrated this time around and this variant may well be more difficult to control. We’re in it for the long haul.?

More importantly, the Delta strain is having its biggest impact on Sydney and Melbourne - our two most populous cities and the engine rooms of our economy. Together, they account for well over 40% of Australia’s entire economic output. When they stop functioning, in many ways so too does the country. There is a real chance of the Australian economy sliding into recession in the September quarter.?

If anything was going to end Australia’s golden run and the run of our property markets this should be it. But even through the current lockdowns, and with the prospect of a recession, we’re seeing positive signs. Consumer confidence is so far staying high. People are finding ways to keep trading. Properties are still selling - for excellent prices - and Sydney’s auction clearance rate remains over 75%. The government is stepping in with support packages. And it’s now looking unlikely that interest rates will rise any time soon – despite recent forecasts of increases as early as 2022.?

Most importantly, the emergence of the Delta strain has also shaken us out of our vaccine complacency, with take up rates improving rapidly. Today we are at 14% nationally and it is increasing around 0.5% per day, with 154 days left until the end of the year. Whereas it once looked unlikely that we would be anywhere near herd immunity by the end of the year, that idea is now not so far fetched, with some modelling suggesting the important 90% level may be reached as soon as December.

Because if anything is really going to help our economy return to the boring, stable growth that the RBA once predicted for us, you would assume it would be the reopening of borders and the free movement of people. Despite the current concern, and terrible plight of some industries and businesses, as a nation we need to have cool heads. People should have some confidence to look through the current seeming malaise – and see that despite any protracted lockdowns, we’ll likely be in a vastly different position at the beginning of calendar year 2022, provided the current rate of vaccine acceleration continues. That is where the next limb of Australia’s mid to long term prosperity resides.?