The government’s midyear economic and fiscal outlook statement last year managed to pick the bottom on the iron ore market: the day after it was released, the iron ore spot price hit $US38, since then it has gone up by 50 per cent.
That rally since December 16 included a 19 per cent spike on one day last week, when some speculators lost the memo from Party HQ about not showing the world that the Chinese financial markets had become a giant casino.
Anyway, in the MYEFO on December 15, the day before the $US38 bottom, Australian Treasury chose $US39 as its iron ore price assumption, down from $US48 in the budget in May.
$US39! That price was the actual bottom of the market. So Treasury based its budget forecasts (ie endless deficits) on the lowest price in ten years persisting for at least another four.
That change in MYEFO cut $7 billion from forecast tax revenues over the forward estimates and contributed significantly to the deficit, and therefore to the need for spending cuts and endless, mind-numbing debates about “tax reform”.
This morning, the iron ore price is $US56.90, having retraced from the $US63.70 to which it shot last Tuesday, up 10 bucks in a day.
Maybe Treasury will turn out to be right. After all, before China began to industrialise and before the spot market came into being, the price never shifted from about $US12 a tonne
Actually, no, it won’t (be right). Even Treasury takes its forecasts with a grain of fines.
In a speech to CEDA (coincidentally on the day the iron ore price spiked 19 per cent), the head of Treasury’s macroeconomic group, Nigel Ray, quoted his colleague Warren Tease on their forecasting abilities: “…we tend to miss turning points, have over-estimated real GDP growth in the years since the global financial crisis and have had biases in our forecasts of prices that have persisted over horizons relevant for policy makers and their advisers.”
Nigel Ray said Treasury was taking a number of actions to try to improve its forecasting, including engaging a panel of experts, asking private sector analysts and endeavouring to “understand more deeply the impact of financial sector developments on our forecasts”.
Source: The Australian