Psst. Want to hear a secret? Economists don’t know what’s going on but it doesn’t stop me from reading and interviewing them! In simple terms, I respect them, but I know they are fallible.
Why? It’s because economies are complicated and just yesterday I did a speech in Kuala Lumpur for an Australian group where I argued that when it comes to what is going on with our economy and its global counterpart, and especially that of the US, this time it’s all different.
We’ve never had a POTUS like Donald J. Trump, the Strait of Hormuz was never a huge maker or breaker for economies, inflation and interest rates and we have never had a business gamechanger such as AI.
Yep, all these have made an economist’s job even harder and so mistakes understandably happen when someone tries to guess the future.
And it was shown again yesterday with unemployment rising to 4.6% in August from 4.5% in July, when the consensus of the number crunchers was that it would be 4.5%.
Sure, it’s a small miss, and anyway, can we trust the Australian Bureau of Statistics? However, a couple of months ago the big four banks’ economists were telling us that rate rises were over, but then a bad inflation number showed up, which wasn’t all that crook. Anyway, it fired up the RBA talking heads and now most of these economy crystal ball gazers are punting on two or even three rate hikes!
Here’s another secret: most economists are academically trained to advise or work out what should be done with interest rates, but they have been sucked into a national guessing game for their company managers who make or lose money on their speculations on what the central bank does, or they do it for the media, which wants a sexy headline.
Want an example? Just look at the one I used for this story.
Yep, economies have always been complicated, because people (consumers, business owners, investors and politicians) aren’t always easy to read.
And these same challenges face the Reserve Bank of Australia as they try to raise interest rates enough to KO inflation but not send us into recession. That’s why they are talking tough, hoping that one or two more rate rises will do the trick, but they don’t know.
The August unemployment number rising from 4.5% to 4.6% was good news for inflation killers like the RBA and interest rate worriers in the mortgage belt, but the central bank needs to see another rise on October 15, and then a better-than-expected CPI on October 28.
If these two numbers play ball with the jobless rate rising and the inflation figure falling, then the RBA might spare us from a rate rise on Cup Day.
Those two readings will be big data drops and they should give us an idea about one of the hardest numbers to forecast, that is, the impact of the Budget-created housing crisis on Australians’ feelings about their net wealth.
That Chalmers’ Budget has changed the interest of investors in property and is part of the reason why Citi is tipping house prices will fall by, wait for it, 16%!
In all my decades of reporting and analysing the economy for major media outlets, and now my own, with its many facets, I’ve never thought a 16% fall nationally was to be expected. I know Professor Steve Keen after the GFC tipped a 30% fall in house prices, but RBA rate cuts stopped that from happening, so if Citi’s economics team is right then we could experience another “this time it is different” situation.
That means if the net wealth effect, mixed in with the four rate cuts of 2026 so far, we should be talking about next Tuesday after the RBA raises the cash rate from 4.35% to 4.6%, then combined all of this could be good for lowering inflation.
And if we are surprised to see a deal between Donald Trump and Iran over opening the Strait of Hormuz, then this good news could be bad news for economists predicting two or three rate rises ahead.
In a very different world for predicting what the economy is up to, to steal from Billy Joel, economists “may be wrong, they may be right” but I don’t think they’re crazy.
That said, this very different Trump-affected economy might be driving them crazy, and on that subject, count me in.
