5 July 2009

Keen was right and I was right for reading him

When everybody in the western world thought we would all get wealthy doing up kitchens and making television about it, I thought I was living in a madhouse.
For predicting the slump, just a few get medals
July 4, 2009

F ONLY these crystal balls always worked. A year ago, our panel thought Australia would muddle through the 2008-09 financial year without too much damage.

Growth would slow a bit, they warned. Unemployment would rise a bit. But the team saw the sharemarket rebounding strongly from the falls of 2007-08, with the S&P/ASX 200 index nudging 6000. The world economy would keep growing. There was no crisis ahead.

Only one forecaster last June did foresee the full extent of what lay ahead — indeed, he saw more ahead than we actually got. That was Steve Keen, of the University of Western Sydney, who for years has warned that Australia's reliance on debt to drive growth would one day bring it down.

Professor Keen told us that growth in 2008-09 would shrink to zero. He forecast that unemployment would rise to 6 per cent, that the sharemarket would fall further, the budget would fall into deficit, and the Reserve Bank would be forced to cut interest rates significantly. By and large, all that has come true.

He was not alone in warning that 2008-09 would be worse than Treasury, the International Monetary Fund and the OECD were then forecasting. (Last July the IMF even declared: "In our view, the balance of risks to growth is tilted toward the upside"; it warned the Reserve Bank to be ready to raise interest rates. No medals for that forecast.)

Stephen Roberts is now with Nomura Securities but was then working for some dudes called Lehman Brothers; perhaps it's not surprising that he saw serious trouble ahead. So did Jakob Madsen at Monash University, Saul Eslake at the ANZ bank, and Heather Ridout and her team at the Australian Industry Group. But none of them saw a slump of this magnitude.

No one a year ago predicted a world recession, not even Keen, who thought it would be confined to chronic debtor countries such as the US and Australia. No one thought the sharemarket would dive to less than half its former value before a minor rebound. Keen was the only forecaster who thought it would fall, but only to about 5000 now. We'll give him a silver medal for that.

No one thought interest rates would dive as low as they have. Keen, Peter Osborne of Merrill Lynch, and the Australian Industry Group team under Ridout all saw big falls in some rates. But the only tip worth gold was Osborne's forecast for the 10-year bond rate to be 5.75 per cent right now.

Roberts deserves a gold medal for tipping the Aussie dollar to be worth US78¢ at this point, and 76 yen. Pity that Lehman Bros is no longer around to pay him the bonus he deserves, because he also won gold for tipping that consumer spending would grow 1 per cent, while housing investment would fall marginally.

The NAB's John Sharma and Peter Jones of Master Builders win gold for tipping the dollar to now be 64 and 65 respectively on the trade-weighted index — well below its value at the time of the tips.

Madsen was the only forecaster to tip the extent of the plunge in the current account deficit, and with Keen, the only one to tip that unemployment would soar to 6 per cent.

Overall, Madsen wins the bronze medal for 2008-09. Roberts takes silver, but the Palme d'Or for the forecaster of the year clearly belongs to Keen.

The bad news is that Keen thinks 2009-10 will be much worse. He says Australia and the world are in the early stages of another Great Depression. The global boom of the past decade was financed largely by increasing leverage; we now face a decade or so of deleveraging.

"We still have massive private debt that has been run up over the past 40 years," Keen says. "The ratio of private debt to GDP now is 1.7 times what it was at the start of the Great Depression. The deleveraging of that debt will swamp anything the Government tries to do in stimulus."

Keen predicts that GDP will slump by 6 per cent in 2009-10, that unemployment will double to 12 per cent, the S&P/ASX 200 will shrink by a third to 2500 — and the Reserve Bank will end up cutting cash rates to 0.5 per cent. Others disagree.

I don't want to be accused of bias, but I hope we won't be handing Keen the Palme d'Or again next year.

Source: The Age

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