Friday, 07 February, 2025
AFR – Meet the most accurate economic forecaster of 2024
AFR – Meet the most accurate economic forecaster of 2024
Cecile Lefort – Markets reporter
Updated Feb 3, 2025 – 9.42pm, first published at 8.00pm
Australia’s top economist Paul Bloxham predicts United States President Donald Trump’s tariff war will test the economy, and the Reserve Bank will be capable of only moderate interest rate cuts in 2025.
The HSBC Australia chief economist was ranked by The Australian Financial Review as the most accurate forecaster of 2024, based on his predictions for the cash rate, unemployment, and inflation last year.
The RBA is all but certain to cut the cash rate to 4.1 per cent from 4.35 per cent at its first meeting of 2025 on February 18, after official data last week confirmed the annual pace of core inflation slowed to 3.2 per cent in the December quarter.
The Reserve Bank is lagging other central banks, which started to lower borrowing costs aggressively last year. Last week, the European Central Bank, the Bank of Canada, and Sweden’s Riksbank cut their benchmark rates again.
The fractured political climate could change the monetary dynamic if tariffs, which come into force on Tuesday, prove to be a source of inflationary pressure.
Mr Bloxham agrees that February is a sure bet for RBA rate relief, revising his call on Monday from a previous prediction the RBA will buy time and move later. “It’s all about increased global downside risks from the escalation of trade tensions. We see it as enough to tip the balance in favour of the RBA starting to support the economy at little earlier than we had previously thought.”
The RBA has held the cash rate at a 13-year high of 4.35 per cent for more than a year, waiting for further evidence that inflation is irreversibly back to its 2 to 3 per cent target.
The last mile to bring inflation down from 3.2 per cent to the 2.5 per cent mid-point is the hardest part, said Mr Bloxham, forecasting another cut in the September quarter and one in 2026.
And with a trade war under way after President Trump slapped 25 per cent levies on goods from Canada and Mexico and 10 per cent on China, there are growing fears that slowing global growth will accompany higher prices for imported goods.
Most economists surveyed by the Financial Review a year ago predicted that higher unemployment and a rapid cooling in inflation would allow the RBA to start easing policy in the second half of last year. Instead, the jobs market defied expectations, with the unemployment rate drifting around 4 per cent.
The bond market got it wrong too. Money markets now imply a 96 per cent chance the central bank will act in February. They signal between three and four rate cuts this year, taking the cash rate to 3.4 per cent.
“The RBA will cut on February 18 because we made consistent and broad progress on inflation in 2024, and it’s enough to start cutting,” said Ben Jarman, chief economist for Australia and New Zealand at JPMorgan, who was ranked the second-best forecaster.
A knife edge
Morgan Stanley economist Chris Read, ranked third, is also tipping an interest rate cut this month such is the weight of expectations. “It would be very difficult for the RBA to disappoint market pricing,” he said.
But policymakers have surprised before. The last time that happened was in April 2015 when former governor Glenn Stevens stood pat on rates, wrong-footing markets and economists who had overwhelmingly expected a cut, according to a National Australia Bank analysis.
“The trade policy changes are clearly upside risk for US inflation, but downside risk for global growth, which is how we think the RBA will see it too,” Mr Bloxham said.
Further complicating the outlook, the US Federal Reserve declared it is in no hurry to cut rates further.
Mr Bloxham was the most accurate cash rate forecaster – a category in which he drew with Dr Jarman and David Robertson, chief economist at Bendigo and Adelaide Bank. Micaela Fuchila, then Australian economist at Bank of America Merrill Lynch and now at Jarden, was among the five forecasters who drew for the second spot with Peter Munckton at Bank of Queensland, Alan Oster at National Australia Bank, independent economist Saul Eslake and Mr Read at Morgan Stanley.
Last year, Warren Hogan was the overall winner, but his hawkish tilt ruled him out of contention this time as the RBA held firm.
Methodology
The Financial Review rankings recognise economists who correctly predicted the cash rate, unemployment rate, and inflation rate for June and December 2024. We analysed forecasts submitted to the quarterly surveys of economists published in October 2023, January 2024, and April last year to scrutinise predictions one year and nine months ahead.
The top-ranked analyst had the lowest error rate across all three indicators. An equal weighting of 33.3 per cent was assigned to each indicator. To be considered, analysts had to provide all nine forecasts.
A panel of three independent financial experts validated the ranking methodology: Fiona Trigona, group treasurer at NBN Co; Annette Beacher, investment manager at HESTA; and Tony Morriss, senior manager in thematic macro research at AustralianSuper.
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