Economic forecasters don’t predict turning points and the Global Financial Crisis of 2008-09 was one of the many downturns not predicted.
But in mid-2007 Charlie Nelson did predict a significant slowdown in Australia’s economic growth rate. He developed a scenario which included negative impacts from international and domestic factors which would result in a severe downturn in the second half of 2008:
He had some knowledge of the sub-prime crisis in the American housing market. He did not know how bad this could get but we knew that many Americans stood to lose their homes. This would have a major impact on the American economy. This would obviously affect Australia’s economy directly, through the share market, and indirectly, by reducing China’s exports to American consumers which would, in turn, slow China and reduce the demand for our commodities. It was seen as likely that this problem would come to a head some time in 2008.
Charlie had visited Beijing in early 2007 and witnessed the complete reconstruction of a city of 20 million people. It was not just Olympic games venues – whole villages were being demolished and replaced with towers of apartments. Then there were new underground train lines and other infrastructure. Obviously, this surge of construction had to come to a screeching halt in August 2008 in order to actually hold the games. This, it was reasoned, would cause a temporary slowdown in China’s economy as seems to happen to every country which hosts the games.
In Australia, the Reserve Bank of Australia (RBA) was lifting interest rates and had been since May 2002 without slowing the economy (the lags are long!). We predicted that the RBA would continue lifting rates and that this would eventually slow the economy in 2008. The RBA went on to lift interest rates four more times – in August 2007, November 2007 (during a federal election campaign, which was unprecedented), in February 2008, and in March 2008. Obviously, they did not expect a global financial crisis within months of the last rate hike!
Treasury, and the RBA didn’t see it coming before it hit in September 2008 (otherwise the RBA would not have been lifting interest rates as late as March 2008). In their survey of economists published on 5 November 2007, the Australian Financial Review’s economics editor Alan Mitchell described the forecasts of the 26 economists as “Another champagne year for Australia”. Not one of them predicted that Australia’s economic growth would slow significantly from late 2008. Charlie had already made that call several months earlier.
By September 2008, only six months after their last rate hike, the Reserve Bank was cutting interest rates as fast as they could.
Charlie’s prediction was noted by Harold Mitchell in The Sydney Morning Herald and The Age on 30 April 2009, by which time Charlie was predicting that Australia had implemented enough fiscal and monetary stimulus to avoid recession – but Treasury, the Reserve Bank and most economic forecasters were still predicting a recession which never happened and continued to do so for several months.