A Beautiful Set Of Numbers?

What a remarkable coincidence: Our top economists and federal Treasury all believe nothing much is going to happen in the next 12 months to change Australia's economic outlook. They are saying that, if nothing unexpected happens, it will be steady as she goes. Economists, of course, are trained to think in terms of equilibria. Anything that cannot be forecast - a shift in commodity prices, a terrorist attack on a big city - changes everything.

At the moment, we have a comfortable consensus of what I describe as a 'bunch of threes'. The real GDPs of the United States and the OECD are expected to grow by close to 3 per cent; and Australian economic activity - private consumption spending, total domestic demand and GDP - will do much the same, coincidentally spinning off a consumer-price inflation rate of just below 3 per cent. In the same period, Asian growth (excluding Japan) will again be more than twice the developed world's pace, adding up to a boost in whole-world economic activity to just under 4 per cent.

No particular dramas are foreseen anywhere in the next 12 months, even though almost all economists are secretly wringing their hands over oil prices, household debt, interest rates, residential property price bubbles, the sensitivity of the US dollar and the obviously imminent evaporation of the Chinese economic boom. These schizoid tendencies in our forecasters should not be too surprising when it is considered that external risks to an economic equilibrium cannot be forecast; they can only be put into a probability-weighted scenario.

Respectable equilibrium-based forecasts, therefore, differ little among themselves until the risks are labelled and quantified, by which time individual forecasters will either have exposed their personal bias - incurable optimism or pessimism - or confirmed the universal impression that they can argue both cases with equal conviction with no minds of their own to make up. My point is that consensus forecasts have little real vaalue. What actually matters is what lies between the lines - the quality of the risk detection that separates uncongenial loners from the herd - because it's always the surprises that drive economies and markets, never what has already been discounted.

What, then, are these possible 'externalities', and how likely are they to upset the apple cart? And should you act on them right now? The principal risks to the present steady state can be boiled down to five, in diminishing order of probability:

• The oil price. Another doubling, to more than $US100 a barrel, after the doubling over the past two years, would begin to be a severe brake on global, especially Asian, growth, as well as a spur to rising inflation and interest rates. This likelihood is waning as inventories rise and new production comes on stream, but continuing global demand growth will keep the oil price high. The overall effect on Australia would be unfavourable, but its strong energy exports would moderate the damage. The Australian dollar would rise, thus limiting interest rate shocks.

• Trade spats becoming trade wars between the high-growth Asian exporters and the slower-moving mature democracies, especially those of the sluggish European Union. The classic lose-lose economic risk scenario - whose probability is still too high for comfort - is now receding as the US dollar and the dollar-linked Chinese yuan recover, because of the strong oil prices, against the euro and yen. American hostility to the parasitic Chinese currency is also waning, but keep a close eye on this factor.
• A property crash in the strong but indebted English-speaking economies. By slashing consumer confidence and spending, this would weaken the world's non-Asian growth engine and, as trade faltered, the Asian dynamo itself. The likelihood is low and receding as strengthening employment and incomes growth continue to support owner-occupier affordability - and no interest-rate shock is - likely unless a truly extraordinary policy mistake is made. Speculative pressures have been bled by mild monetary measures and the bank lenders are not dangerously exposed today.
• China's economic and financial implosion. This would have a big impact because the transformation of China and its regional satellites into an integrated global supply powerhouse remains crucial to the high-growth, low-inflation outcome we now enjoy. Its near-term probability is, however, much lower than many believe. The region's financial surpluses continue to be actively recycled, mostly through the efficient Western capital markets rather than through China's inefficient banking system. Over and above last week's revaluation of the yuan, what matters is domestic political control, which remains unchallenged, and China's foreign prestige, which, to be sure, will be ruthlessly defended at least until the 2008 Beijing Olympics.
• Terrorism, war, famine and plague. These biblical externalities are always possible but seldom likely to affect overall economic activity, especially under the present conditions of globalisation. This was illustrated by the reactions to the terrorist attacks in London. The unstable and, therefore, unpredictable political conditions in the Middle East always bear careful watching, for their impact on energy prices and on security elsewhere. Plague and famine can erupt at any time, but recent G8 initiatives on African debt relief give some hope of relief. And droughts can break, as Australia may be seeing now.

Since they are not at all independent of each other, the actualisation of any one of these risks can, theoretically, reverberate by raising the probability of the others. But no one should be too worried about those linkages, since the natural behavioural and policy resistance that usually confronts any threatened catastrophic cascade means that risks are not multiplied in reality. In other words, the default state of the world is that we usually muddle through rather than obey Murphy's Law. The unexpected happens, but we cope and survive.

And, for the next year at least, you can safely make a forecast of that happening.