A YEAR ago, the Reserve Bank forecast that non-farm GDP would grow by a buoyant 3.25 per cent in 2010. In fact, it grew 2.1 per cent. The RBA predicted underlying inflation, its key target, would grow 2.75 per cent. In fact, it grew 2.2 per cent.
Those erroneous forecasts drove the Reserve's decision to raise interest rates four times in 2010, while the private banks exploited the lack of competition to boost their profits with what amounted to a fifth rate rise.
Now, we seem to be in deja vu. The Reserve's new forecasts yesterday assume that the growth in output and prices that didn't happen in 2010 will show up in 2011. And its concluding comments clearly flag an interest rate rise ahead.
It estimates that the floods in January will send GDP backwards in the March quarter. That implies non-farm GDP growth for the year to March of just 1 to 1.5 per cent. Yet despite that, the RBA predicts growth for 2011 at 4.2 per cent, and non-farm growth of 4.5 per cent, with underlying inflation rising to 3 per cent.
Well, that implies an annualised GDP growth rate of 6 per cent over the three quarters to December, including this one. And that's with the dollar dragging down trade-exposed industries; consumers saving, not spending; housing in a slump; job growth slowing; business confidence flat; and the risks to global growth still significant.
But wait, there's more. The final section of yesterday's Statement on Monetary Policy warns that the biggest risk to that forecast is that the economy will grow even faster, and put even more pressure on prices. Its central forecast is for a 2011 boom, with a big risk that the boom will get out of hand.
Well, it's possible. The Reserve has picked some long shots before. And yes, mining is booming, but the economy is not.
A year ago, the Reserve forecast GDP growth in 2010 and 2011 combined at 7.1 per cent, with inflation at 6.1 per cent. Despite all that has happened since, yesterday its two-year forecasts were exactly the same. It simply shifted into its 2011 forecasts the growth it wrongly predicted for 2010. With the data pointing elsewhere, this suggests a touch of hubris, that might be insulating it from the reality on Main Street. The data we see presents no credible case for a rate rise. Last year the Reserve jumped the gun, delivering too much restraint, too soon. The risk now is that it might repeat that mistake.
