Exchange rate and Treasury forecast

Comments on the report “Treasury chief says rise in $A could hurt exports”, 3/06/2009, http://www.businessspectator.com.au/bs.nsf/Article/Rise-in-Aussie-dollar-could-hurt-exports---Treasur-SN5EQ?OpenDocument

This is an example why Treasury forecast of above trend growth the economy used to underpin the Rudd/Swan budget 2009 was problematic and too optimistic.

They assumed Australia will benefit from China's growth, but at the same time did not make plausible assumption about the impact of China's growth on the $A. The remarkable feature of this is that it has not been long since that forecast for the $A to shoot up.

Yes, currency will fluctuate all the time, but there are some important underlying factors that should be taken into account when forecasting the Australian economy.

It was not the best course for Treasury to take to be optimistic without carefully considering the important and likely downsides. More importantly, the Treasury forecast suffered another serious drawback of the issue that was the Locus’ critique, as I argued elsewhere earlier.