31 March 2020
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Can we trust economists' views on our economy?

Peter Switzer
24 January 2019

Today we get the latest reading on unemployment and it comes at a time when economists are downgrading their optimism about the Oz economy. But can we trust these prophets of doom or gloom?

The key word is trust and you have to ask how many professionals’ views can you really trust? Cardiologists have differing views on statins. Lawyers never agree on anything. Accountants have different levels of insights on what tax should be payable and financial planners come in all different degrees of investment skill and trustworthiness!

Yesterday, the world’s economic and investment experts were stressing about the IMF’s downgrade of global economic growth from 3.7% to 3.5% for next year — a lousy 0.2% — and the Dow dropped over 300 points. At least our stock market was more measured in its reaction, with the S&P/ASX 200 index only down 15 points, or 0.26%.

Right now, economic and investing views are very different and the level of consensus is lower than it has been since the positive views of the US and world economy started to wobble in 2018. That’s why the stock market had a shocker last year, especially in the US. This chart shows how the stock market reflected economic and market confidence until 2018 brought trade wars and the US central bank’s higher interest rates.

Source: Google

And then there was Brexit, Italy and EU problems, a China slowdown and locally the Royal Commission fallout and APRA’s as well as the RBA’s crackdown on the booming house prices in Sydney and Melbourne.

Where economists were talking about global synchronized growth at the start of 2018, now they’re talking about synchronised slowdowns. Not many are dragging out the R-word for recession but it’s starting to get some interested parties testing out its possible relevance!

Clearly, those tipping huge falls in house prices here in Australia — these people are in a minority but they’re a loud cranky mob who give it to me on Twitter — can only be right if a recession ends up coming to Australia.

That economic pestilence is more likely to be delivered from overseas, either via a US recession or via a bigger-than-expected slowdown in China, which could add to problems created by the housing slowdown and the negative lending implications, thanks to the Royal Commission.

Also if Labor goes ahead with it negative gearing changes too early that could also add to the economic negativity for Australia.

But this is not what economists as a group believe. The consensus view of the people trained to know more about the economic world generally believe the following:

• US grows OK this year and could be threatened by a recession in 2020 but it’s no certainty. In fact, Donald Trump will work hard to avoid this happening in his re-election year.

• The stock market in the US and here will crawl higher.

• House prices in Sydney and Melbourne will drop between 15-20% but most are closer to 15 rather than 20.

• China will stimulate to avoid a big slowdown.

• The US central bank will be reluctant to raise rates quickly, which will help delay a recession.

• Brexit is anyone’s guess but a ‘muddle through’ view dominates economists’ thinking.

• The EU economy will slow down but more stimulus is probable from the central bank there.

Economics is a hard thing to get right consistently because there are so many moving parts and what happens in one economy doesn’t necessarily happen in others.

We avoided a GFC recession because our banks were badly exposed to the bad products linked to the crazy NINJA loans in the US, where people with no income and no jobs got home loans! Also, here in Australia, the Government would stand behind our banks. We might have to pay higher taxes to make it all work but it is possible to prevent a 40% fall in house prices.

One Twitter critic looked at what one Switzer supporter put forward as to why we wouldn’t be like Ireland and have the same house price collapse, and he cynically said: “Ah, a new paradigm!”

He was laughing that we might be different to Ireland but we could be because in economics there aren’t many reliable paradigms. The variables can be so different that you can’t say what happened here has to happen there.

How have we grown for 28 years without a recession? The answer lies in our many very different circumstances.

Steve Keen’s predictions for house price collapses in 2008 would have been right if the Rudd Government played a conservative, non-interfering game and our banks were as badly supervised as US banks and China wasn’t our most important trading partner.

Robert Schiller, the Nobel Prize winning economist is writing a book that says narrative economics is more than fundamental economics. This will shock a lot of economists and I think he is exaggerating the importance of big, scary or positive stories or narratives in determining how economies and markets respond but these stories are important.

If I and every business journalist, commentator and market expert didn’t believe that the US recovery programme put together in late 2008 during the GFC, then the Great Recession of the USA would have been the Great Depression of the 21st century!

Stories are important and that’s why I question exaggerations that house prices have to fall by 40%, a recession has to happen this year and that economists, Reserve Banks and doomsday house price ‘experts’ are right.

This subject of economics, if you know much about it, is very hard to be a confident predictor about.

The great John Maynard Keynes once said: “When the facts change, I change my mind. What do you do?”

And ironically, just to show you how contrarian the whole economics profession is, they’re now questioning whether he even said that!

Economists aren’t always right but you ignore them — both majority view ones and minority view ones, like Steve Keen — at your intellectual peril.

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