Qld Treasury’s forecasting record has improved in last few years, but big test to come

GSP_forecast_vs_actual

In the Mid-Year Fiscal and Economic Review at the end of 2014, Queensland Treasury downgraded its economic growth forecast for Queensland in 2014-15 from 3% to 2.5%, to reflect the weaker economic outlook. After Queensland’s technical recession in the last six months of 2014, in which gross state product (GSP) contracted by around 1 per cent (in seasonally adjusted terms), it appears that the GSP growth estimate for 2014-15 will probably need to be revised down even further at Budget time in July. And it is highly uncertain whether Queensland should still expect growth of around 5.75 per cent in 2015-16, although some of this growth appears guaranteed by LNG exports from Gladstone that are starting to boost Queensland’s export numbers.

As I’ve commented before, I have a lot of sympathy for Treasury in undertaking the challenging tasks of forecasting the economy and the Budget (see Brisbane ABC radio interview– why is budget forecasting so difficult?). At least Queensland Treasury appears to have improved its forecasting performance in the last few years relative to most of the years in the 2000s, in which the forecasting errors were much larger (see chart above). But, as I’ve tried to suggest above, there is a big test to come.

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8 Responses to Qld Treasury’s forecasting record has improved in last few years, but big test to come

  1. Paul McGuire says:

    A very interesting chart. Another interpretation is that from 2001-02 until 2006-07 the forecasts were generally pessimistic, whereas since 2007-08 they have generally been optimistic. It is probably better to be pessimistic and to have budget outcomes come in better than forecast, rather than the other way around. Also interesting that the forecasts do not fluctuate nearly as much as the actuals, i.e. forecasters are reluctant to forecast that growth will be too far from the medium term average.

    • Gene Tunny says:

      Yes, good interpretation, Paul. Much better for Treasury to be pessimistic so Govt doesn’t spend money it doesn’t end up getting. Thanks for the comment.

  2. Alistair Robson says:

    I’ve been involved in such forecasting at interstate Treasuries. It’s very difficult to estimate what will happen in the future, no matter how many resources are put in (I suspect the marginal benefit of putting in extra resources diminishes quickly). I remember we got complaints with forecasts in the past, having to compare with other forecasters and finding we tended to have the closest forecasts to actual GSP growth outcomes.

    Economists tend to be pinned to these forecasts no matter how we point out their failings and providing a what if analysis.

    I have little sympathy for people who complain based on the above.

    • Gene Tunny says:

      Yes, there are definitely diminishing marginal returns in forecasting. Certainly complex econometric models aren’t much use. Thanks for the comment, Alistair.

  3. As Paul says, it’s interesting that the forecasts (barring the GFC induced panic forecast for 09-10) rest within a narrow 3-5% range while actual results have been as low as 1% and as high as 7%. Forecasters and models are indeed reluctant to deviate too far from norm….
    If the Treasury do revise down the 14-15 forecast (as you would have to feel they will), then this would be the first time in at least 15 years (again barring 09-10) that forecast growth has fallen below 3%. Given the reluctance to deviate; what does this say about how concerned Treasury actually are?

    • Gene Tunny says:

      Thanks for the comment, Pete. I expect the GSP numbers for late 2014 should convince them they need to make a major downward revision to the 2014-15 estimate, even if they are reluctant to.

  4. Jim says:

    I wonder how Paul the Octopus (that predicted the World Cup matches) would go against the forecasters?

    • Gene Tunny says:

      Haha, good question, Jim. You’ve made me think about how a simple rule like just using the long-run average or last period’s growth rate would perform against the actual forecasts made? Possibly quite well. I might investigate.

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