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'S FINANCIAL market economists devote considerable time and effort to forecasting economic data. Yet there have been few systematic attempts to test the efficiency of these forecasts in an Australian context. An obvious question is whether diese forecasts significandy outperform a simple moving average model. For economists to be able to justify die effort diey put into forecasdng, dieir average forecast error should be significandy narrower dian dial generated by a naive model. Standard & Poor’s MMS has surveyed economists’ expectadons for key Australian data releases for over ten years. While die resuldng market medians are die forecast of only die ‘middle’ economist, die academic literature suggests that individual economists cannot outperform market medians over sustained periods of dme. Taking die market median as the ‘representative’ economist is therefore likely to strengdien die overall forecast accuracy of market economists as a group reladve to what any individual forecaster is likely to achieve. Table 1 sets out die average forecast error made by die median economist for each quarterly GDP and CPI release since die June quarter 1985. This is compared widi die average forecast error generated by a simple four-period moving average model. The model takes die average of die previous four quarters’ GDP or CPI growth as the forecast for the subsequent quarter. The moving average model is applied to die data as originally reported. These are the same data as diose available to economists at die dme diey made dieir forecast. The table shows diat die average GDP forecast error of the median economist is only 0.15 percentage points less dian diat for die naive model. Taking out the more extreme errors by using die median instead of the average error still sees economists outperform die naive model by only 0.19 percentage points. Similarly, die average CPI forecast error of die median economist is only 0.25 percentage points less dian diat of die naive model. Widi die CPI, we are probably more jusdfied in using die median error, given some of die large forecast errors made by bodi economists and the naive model due to die rapid structural break in inflation that occurred in die early 1990s. In diis case, the economist does only 0.15 percentage points better dian die naive model. While diis is a potentially significant difference in forecast accuracy in today’s low inflation environment, it is less significant for most of die period since 1985.

Economic Forecasting and the Role of the Economist