Friday, June 19, 2009

Foreasting Australian Gross Domestic Product

For some weeks I have been growing increasingly sceptical of the projected GDP growth figures published in the Federal Government's Budget. They state consecutive annualised real GDP growth rates of 4.5%.

I remember Mr Swan claiming that these projections were "extremely realistic and conservative." I am also aware that some economists believe that these forecasts are as plausible as any other (though like all such forecasts, they are only ‘best guesses’).

I, however, am not so sure. The more I think of them, the more implausible and unrealistic they become. Consider the chart above, 11 times in the last 47 years real growth in GDP exceeded 4.5%. Only on 6 of these occasions were they consecutive. The last time we experienced consecutive annualised growth rates of 4.5+% was 1985. Before that, mid 1960s to 1970. Therefore recent history suggests these projections are very unlikely.

It is also important to understand the conditions under which these growths were experienced. In 1985 the Australian economy was being deregulated (for example in 1983 the exchange rate was floated) and union power was being curtailed (wages and income accord). These environmental factors are a lot different to what we are experiencing today. One may reasonably argue the current Government is moving in the exact opposite direction as the Hawk government.

This brings me to the real issue, what impact will smaller growth rates (which are much more likely) have on the economy?

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