RDP 2012-07: Estimates of Uncertainty around the RBA's Forecasts 7. Conclusion

Using past forecast errors, we construct confidence intervals about the SMP forecasts of underlying inflation, the CPI, real GDP growth and the unemployment rate. These intervals, shown in Figure 3, span a wide range of outcomes. Our estimates indicate that uncertainty about the forecast is high, particularly for GDP growth.

These estimates can be compared to various benchmarks, such as the amount of variation in the data. We find that RBA forecasts have substantial explanatory power for inflation over the first forecast year. However, like many other forecasters, the RBA forecasts explain very little of the variations in GDP growth, medium-term changes in unemployment, or the medium-term deviations of underlying inflation from the target.

Uncertainty about RBA forecasts is similar to that about private sector forecasts. More precisely, RBA forecasts of inflation have been marginally more accurate than the average of private sector forecasts, while RBA forecasts of GDP growth have been less accurate. However, the differences are not large.

This paper is part of a broader process of review. The RBA continuously examines its forecasting performance with a view to understanding the economy and improving forecast accuracy. Changing conditions and ongoing research lead to new techniques and information sets being regularly adopted. But even as the forecasts evolve, considerable uncertainty will remain.