Flawed Forecasts for Aussie Dollar
D. Thomas
October 2000
The actual value in June was 59.9 cents and it has since slipped below 53 cents!
That so many economic forecasters got the direction wrong and that all were so far off the outcome is disturbing. Exchange rates impact on exports and imports, tourism, and inflation. If we can't forecast exchange rates with any accuracy, then we can't forecast many important facets of the economy accurately either. And that is likely to lead to poor fiscal and monetary policy decisions, poor investment decisions, and bad business forecasts.
Even with the benefit of hindsight, the economists are not sure why their forecasts were so bad. Factors cited include the strength of the $US (!); Australia's foreign liabilities, trade balance, interest rate differentials, and perceptions that Australia is an "old" economy.
But surely most of these factors were known about at the time?
What about the rise in oil prices? Could that have raised expectations of a global economic slowdown and hence an expectation that commodity prices may fall soon, weakening Australia's exports?
As if to inject some comic relief into this tragedy, billionaire retailer Gerry Harvey has bet any economist $10,000 that the Australian dollar will reach US60c by October 2001. As a major importer, his retail chain Harvey Norman would be much happier with a higher dollar. Gerry Harvey would hope that his bet will become a self-fulfilling prophecy.
If economists cannot do better, we have to accept that the exchange rate is random and hedge accordingly. A most unsatisfactory situation.
I hope that the economic profession is conducting some substantial research to improve their understanding of currency movements and ultimately the accuracy of their future forecasts.