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Changed external environment and Treasury forecast again

Comments on report “Treasury defends eco growth estimates, puzzled by IMF forecasts”, 3/06/2009, http://www.businessspectator.com.au/bs.nsf/Article/Treasury-defends-eco-growth-estimates-puzzled-by-I-pd20090603-SN2K3?OpenDocument

Henry was again defending the indefensible of the Treasury forecast, although he had few other choices.

It was reported that Dr Henry said "When economies are experiencing weak periods of growth, it is usually the case that those weak periods of growth are followed by strong periods of growth".

But the important question is: is this a usual case? The answer is more likely to be no.

There is a synchronised global recession, or a great recession, following a severe financial crisis that almost brought the world banking system down and nearly plunge the world into depression. This is unusual rather than usual. The recession in some of the advanced economies, such as the US, UK, is a so called balance sheet recession. The Japanese experience of a lost decade in growth in the 1990s was a balance sheet recession. That may provide some food for thought for the current one in world largest economy now.

We also have another unusual situation, that is, of significant imbalance between savings and consumption in the US at least. This had not been taken seriously before the economic crisis and is taken much more seriously now and for the next few years if not the decade. There will be some adjustment of savings and consumption in the US that means likely slower than usual growth for a period due to falling share of consumption in GDP.

So by important measures, this is not a usual time or case or situation or circumstance. Treasury should have realised that. But apparent it did not, whatever its reasons. It should and in my view will be a lesson for Treasury and its top brass in economic forecast. They should heed to Lucas critique and should analyse the broad environment much more carefully. The business as usual approach does not always work.

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