On Campbell Live tonight they were searching for an animal to be our oracle for the Rugby World Cup. My vote is for Pikelet the pig. That got me thinking. Who would be better at predicting our economy - Pikelet or a bank economist? I’ve spent three hours tonight tediously going back and reading bank economist commentaries from 2008 and 2009 and comparing them with today. To give them credit, these guys are prolific with their output and commentaries. For a long time I've felt that economists are not greater forecasters. They tend to rely too much on the past to explain the future. They also tend to chop and change their forecasts depending on the latest bit of data. There does not tend to be a consistent long-term view, with the exception of Cameron Bagrie at ANZ. My rationalisation of this is that they have to write commentaries every week and so tend to take a short term perspective. After all, it would be boring if the same mantra came out week after week. To be fair the one consistent theme that has come out of bank economists all year is that interest rates will go up 3%. Since then, long-term wholesale rates have collapsed and a big increase in mortgage rates is now seen as unlikely. Of course this will all be post-rationalised and explained. Some would say that economics is the art of explaining what has already happened. In light of today's market, read this Christmas 2009 gem from Tony Alexander at BNZ: “and of course the housing market has improved substantially after having only a mild downturn, which we had long predicted [...] but there is upward momentum and for us that means improving retail spending through 2010, rising house construction and of course house prices, improving manufacturing (assisted by the new boom in Australia), and employers looking more aggressively for staff....”
The oddest thing is that for most of last year I swear BNZ was talking property up, then we get this in July 2010: "BNZ said house prices were subdued because they were still well above long-term fair value and the housing boom from around 2003 still looks a bit nutty."
Are we just the pot calling the kettle a turnip?
Yup, probably. Actually, I think we've been pretty good at calling rates so far. Go back and read this one from February 2009 - Mortgage rates have bottomed. We were the first to call the bottom and we also signalled that when rates started to increase the longer term rates would increase quickly. Then when economists and journalists started scaring the public into thinking rates would quickly hit 8.5% we posted Don't panic about rates. We followed up with my favourite post ever - Market is mispricing mortgage rates (how accurate was this one on longer-term fixed rates given recent falls!) and then more recently we forecast rates to stay low for 2010. If we got one post/forecast wrong this year it was this one back in January - Mortgage rate forecast 2010. Even I was a little too bullish! The sentiment however was still correct.
What about property?
Generally speaking we have forecast softer house prices: NZ Property Price Forecast - around 10% to 15% from the peak. That seems to be a bit more pessimistic than what bank economists are forecasting. I tend to agree with their rationale, so the difference is in our perception of the state of the economy. I should point out there are still bloggers out there talking property down 40%. It’s easy to take extreme views when you never put your name to anything. That never happens with Pikelet.
What recovery?
In general I find our bank economists too bullish on our economy and the "recovery." Asked what they think of the possibility of a "double dip" a bank economist explains that any crash or double dip would be considered an “unexpected event.” If you read any economists’ forecasts at the moment they seem to be written on the basis there are no "unexpected events." In other words, if our forecast is wrong it is because of any number of unexpected events. I say au contraire, “How can you not expect a car crash if the driver is drunk behind the wheel?”
To conclude, I'm backing Pikelet.
Qualification: all forecasts on our site assumes the New Zealand economy is in the poo. If the economy for any unexpected reason should grow strongly then we will change our rate forecasts.