). graph 4 not surprisingly, forecast misses are more common than not, as i have already noted. the inflation misses ( the vertical axis ) are centred on zero ; they have been unbiased. but the unemployment misses ( the horizontal axis ) have been negative more often than positive. that is, on average over this period, the unemployment rate has been lower than we had forecast. that's a good economic outcome. but, as a forecaster, this bias is something we would hope to avoid. http : / / www. rba. gov. au / speeches / 2017 / sp - dg - 2017 - 10 - 26. html 11 / 16 27 / 10 / 2017 uncertainty | speeches | rba i have labelled on the graph some of our biggest misses. the cluster on the left represents the financial crisis, which we thought was going to deliver much lower growth and higher unemployment in 2010 than it did. again, from an economic outcomes point of view, it is better that it turned out this way. if we ask ourselves, why did things turn out to be better than feared in this instance, a large part of the explanation was the unexpectedly large fiscal stimulus in china in 2008 - 09, which was particularly beneficial for the australian economy. there was also the beneficial effect of fiscal actions in australia and the labour market turned out to be more flexible than we had expected. finally, there was the domestic monetary policy response and the depreciation of the exchange rate, the extent of which were not forecast. most of these fall into the category of were difficult to foresee ex ante. ex post events, which the cluster at the top represents the increase in underlying inflation in 2008, which we did not fully anticipate. in the bottom left is 1999, when both unemployment and inflation turned out surprisingly well. but these outliers are unusual, with most of our errors clustered around the centre. to reinforce that point, i have drawn ellipses – under certain assumptions we would expect 70 per cent and 90 per cent of our forecast errors to fall within these ellipses, respectively. a feature of the chart is how featureless it is. it is tempting to assume that forecast misses for unemployment and inflation would be negatively correlated ; if unemployment is surprisingly low, then inflation would be surprisingly high. this would be consistent with demand shocks. but, in reality, there is not much correlation. supply shocks – where, for example, both unemployment and inflation were

recovery. we can be confident that our economy will bounce back and that we will see it recover. we need to remember that once the virus is satisfactorily contained, all those factors that have made australia such a successful and prosperous country will still be there. inevitably, the timing and pace of this recovery depend upon how long we need to restrict our economic activities, which in turn depends on how effectively we contain the virus. so it is difficult to be precise and it makes sense to think in terms of scenarios. consistent with this, the bank will discuss some possible scenarios in the statement on monetary policy in a few weeks ’ time. one plausible scenario is that the various restrictions begin to be progressively lessened as we get closer to the middle of the year, and are mostly removed by late in the year, except perhaps the restrictions on international travel. under this scenario we could expect the economy to begin its bounce - back in the september quarter and for that bounce - back to strengthen from there. if this is how things play out, the economy could be expected to grow very strongly next year, with gdp growth of perhaps 6 – 7 per cent, after a fall of around 6 per cent this year. there is though quite a lot of uncertainty around the numbers, with the exact profile of the recovery depending not only upon when the restrictions are lifted but also on the resolution of the uncertainty that people feel about the future. it is harder to make forecasts about the unemployment rate given the uncertainty about how many employees will remain attached to their firm and whether people who are stood down will be looking for employment and thus be counted as unemployed. but it is likely that the 2 / 5 bis central bankers'speeches unemployment rate will remain above 6 per cent over the next couple of years. with many firms delaying or cancelling wage increases, year - ended wage growth is expected to decline to below 2 per cent, before gradually picking up again. in underlying terms, inflation is expected to remain below 2 per cent over the next couple of years. of course, there are other scenarios as well. on the optimistic side, the restrictions could be lifted more quickly, with the virus being contained. in that case, a stronger recovery could be expected, particularly in light of the very large monetary and fiscal support that is in place. on the other hand, if the restrictions stay in place longer, or they have to be reimposed, the recovery will be delayed and interrupted. in that case, the