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ISSN 1442-9500 (print) ISSN 1442-9519 (online) Print Post Approved PP381667/01204 Issue 19

Melbourne Institute NewsMarch 2008

Consumer Sentiment, GDP and Consumption

How well does the Westpac – Melbourne Institute Consumer Sentiment Index and its components

forecast Australian GDP and consumption? Page 3

Melbourne Institute Monthly Bulletin of Economic Trends

A new monthly report, Melbourne Institute Monthly Bulletin of Economic Trends, provides forecasts of the

state of the Australian economy.Page 5

A Multidisciplinary View of Obesity

This article provides the key messages from the March Policy Forum of the Australian Economic Review.

Page 6

www.melbourneinstitute.com

2008 Economic and Social Outlook Conference

Economic and Social Outlook ConferenceThe Melbourne Institute and The Australian are hosting New Agenda for Prosperity, the fifth in the series of Economic and Social Outlook Conferences, on 27 and 28 March 2008 at the University of Melbourne.

Australia has experienced a remarkable period of economic prosperity over the past decade or so, fuelled partly by sustained, generally strong growth in our trading partners in the developing world and a trend improvement in our terms of trade not seen in over one hundred years. Real income per capita has risen. Unemployment is at a multi-decade low. However the supply side of the economy is now stretched tight. Inflation has begun to rise. And the government has placed a number of new, dramatic policy challenges squarely before us, including whether the benefits of Australia’s economic progress have been shared fairly; how to save the planet from climate change without imperilling our children’s prosperity; and how to redress indigenous disadvantage to give practical expression to the apology the new Parliament delivered as its first order of business.

New Agenda for Prosperity will bring together over 70 prominent Australians to speak in more than 20 separate sessions about these and a range of other pressing issues, including health, education, housing, infrastructure, broadband, tax reform, deregulation and innovation. A particular feature will be several sessions devoted to examining the policy challenges we face if the China-led boom continues, including: how do we keep inflation under control without triggering recession? what economic reforms are necessary to improve the flexibility of our economy and its capacity to respond to economic shocks, raise productivity and sustain the growth of living standards? what should we do next in welfare reform? and how do we boost the labour supply equitably so we can sustain a higher economic growth rate into the future?

Cont’d on page 2

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Economic and Social Outlook Conference (Cont’d)

Speakers will include the Prime Minister, The Hon. Kevin Rudd, MP; the Treasurer, The Hon. Wayne Swan, MP; the Leader of the Opposition, The Hon. Brendan Nelson, MP; the Shadow Treasurer, The Hon. Malcolm Turnbull, MP; and seven other Commonwealth or Shadow Ministers.

A distinguished list of academic speakers includes Vice-Chancellors Professor Glyn Davis, Professor Richard Larkins and Professor Alan Robson; and Professors Ross Garnaut, Bob Gregory, Geoff Masters, Collete Tayler, Mark Wooden and Tony Scott.

Other distinguished speakers include: Jeff Lawrence, Secretary of the ACTU; Tony Nicholson of the Brotherhood of St Laurence; Andrew Johnson of the Australian Council of Social Services; Gary Banks, Chairman of the Productivity Commission; Chris Richardson of Access Economics; Phillip Glyde of ABARE; Heather Ridout of the Australian Industry Group; Hutch Ranck of DuPont Australia and New Zealand; and Mike Keating and Rod Sims amongst many others.

Climate change and indigenous disadvantage will be addressed in separate plenary sessions intended to be real highlights of the conference. Fred Chaney will chair the session ‘After the Apology’, a session devoted to considering the practical options available to the government to combat indigenous disadvantage, including whether the ‘intervention’ recently introduced

into the Northern Territory is replicable elsewhere. Other speakers in that session include the Commonwealth Minister and Professor Marcia Langton and Galarrwuy Yunupingu.

A special feature of this conference is that the Finch Lecture will be held as a concurrent session of the conference. Professor Richard Cooper of Harvard University will speak on a topic related to global imbalances.

The election of a new government with a commitment to reform provides a major opportunity to reconsider the policy challenges Australia faces today. Indeed the government signalled the importance of undertaking such a stocktake when it commissioned the 2020 summit, a gathering of 1000 of Australia’s leading thinkers and influencers that the Prime Minister has called together in April. New Agenda for Prosperity is therefore a timely opportunity to reflect on the position of a number of Australia’s leading figures from politics, business and academia on vitally important economic and social policy issues that confront us and to contribute to the debate by participating in the discussion periods at the close of each session.

The full conference program and registration form are available from the Melbourne Institute’s website. For all conference enquiries, contact the Melbourne Institute on 03 8344 2154 or email <melb-conf@unimelb.edu.au>.

HILDA Release 6Release 6 of the HILDA Survey data (which includes waves 1 to 6) is now availableA special feature of Release 6 is that it includes the repeat of the wealth module in wave 6 (it was first collected in wave 2). For the first time in Australia, researchers now have the chance to understand how household wealth changes over time. The Release 6 DVD includes data for waves 1 to 6 and are provided in SAS, SPSS and Stata format. The DVD also includes codebooks and other relevant documentation. These data are made available, under license, to legitimate researchers and government employees with a research function.

Further details on how to order the data are available at <www.melbourneinstitute.com/hilda>. The HILDA User Manual and On-Line Data Dictionary are also available from this website.

Treasurer, The Hon. Wayne Swan

Prime Minister, The Hon. Kevin Rudd

Leader of the Opposition, The Hon. Brendan Nelson

Shadow Treasurer, The Hon. Malcolm Turnbull

Melbourne Institute of Applied Economic and Social Research - Page �

Consumer Sentiment, GDP and Consumption

In a recent Melbourne Institute working paper, Chew Lian Chua and Sarantis Tsiaplias examined how well the Westpac – Melbourne Institute Consumer Sentiment Index and its components forecast Australian GDP and consumption. The working paper examines whether the disaggregation of the consumer sentiment data into its sub-components improves the real-time capacity to forecast GDP and consumption. A Bayesian error correction (BECM) approach augmented with the consumer sentiment index and permutations of the consumer sentiment subindexes is used to evaluate forecasting power. The forecasts are benchmarked against both composite forecasts and forecasts from standard error correction models. We find that consumer sentiment data increase the accuracy of GDP and consumption forecasts, with certain components of consumer sentiment consistently providing better forecasts than aggregate consumer sentiment data.

Why Disaggregated Consumer Sentiment Data?

There are two major motivations for using disaggregated consumer sentiment data to forecast GDP and consumption. First, consumer sentiment indices are typically obtained as a weighted average of subindexes focusing on particular aspects of consumer sentiment. The subindexes are constructed by reference to consumer responses regarding family finances, economic conditions and purchasing intentions over various time horizons. The varying scope and time horizon of the subindexes may well be exploitable for forecasting purposes. Relative to aggregate consumer sentiment, the subindexes concerning present conditions and intentions may improve short-term forecasts (with an analogous interpretation for subindexes concerning longer term conditions and intentions). In turn, it may reasonably be expected that subindexes pertaining to family finances will provide better forecasts of consumption and production than subindexes concerning the more amorphous and difficult task of judging economic conditions. Second, the substantial contribution of consumption to the GDP figure, and associated evidence of a co-movement relationship between GDP and consumption, raises the possibility that consumer sentiment is a useful predictor of both variables (as shown in the accompanying graph).

Some Empirical Findings

The best forecasts for GDP tend to be associated with the subindexes concerning family finances and economic conditions in the next 12 months. In contrast to the evidence for consumption, shorter-term variables consistently provide better forecasts of GDP at all forecast horizons, with the medium-term economic conditions subindex only present in the best GDP forecasting models at the 1-step ahead level. In general, the (shorter-term) subindexes concerning family finances are present in the best forecasting models for both GDP and consumption at all forecast horizons, suggesting that the family finances subset of the consumer sentiment data is most useful for forecasting purposes.

Overall, the composite forecasts for GDP produce better 2-, 3- and 4-step ahead forecasts than all other models. The composite forecasts for consumption, however, are less accurate. The best augmented BECM forecasts outperform their composite forecasts at all steps. The standard BECM models generally produce weaker forecasts than either the augmented BECM models or the composite approach, especially at greater forecast horizons, suggesting that the inclusion of consumer sentiment data produces better forecasts of GDP and consumption.

Full details of the study are contained in Melbourne Institute Working Paper 3/08, available from <www.melbourneinstitute.com>.

The Association between Australian GDP and Consumption

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We are pleased to announce the formation of the Health Economics research program within the Melbourne Institute at the University of Melbourne.In addition to staff employed at the Melbourne Institute, members of the research program include economists working in health from across the University of Melbourne, including the Department of Economics, School of Population Health and Department of General Practice.

Health Economics Research Program

The aim of the program is to be a centre of excellence both nationally and internationally for health economics research. The program will provide a focus for health economics research and training and seeks to build capacity in health economics research in Australia

Research is being conducted across a broad range of health economics and policy issues, including health care system efficiency and performance, health workforce, and the socio-economic determinants of health.

The program is led by Professor Anthony Scott (a.scott@unimelb.edu.au).

Our website has further details: <www.melbourneinstitute.com/research/health>.

Melbourne Institute Wins Major Vocational Education and Training Research ContractThe Melbourne Institute has been awarded a three-year contract by the National Centre for Vocational Education Research (NCVER).The contract marks the beginning of a strategic partnership designed to provide a long-term approach to research on significant issues facing the vocational education and training sector (VET).

“The Melbourne Institute’s role in the project will be to build our understanding of the economic aspects influencing people’s decision to participate in VET and the relationship between VET and the labour market,” says NCVER’s Managing Director, Dr Tom Karmel.

“The Melbourne Institute will provide high quality evidence based policy advice on how to address the most pressing issues facing the VET sector and the Australian economy. Australia’s international competitiveness depends on up-skilling the workforce, and VET can play a very important role in this process,” explains Professor Kostas Mavromaras, Chief Investigator of the research and Head of Labour Economics and Social Policy at the Melbourne Institute.

The NCVER research program is designed to support the five national research priorities set by the Ministerial Council for Vocational and Technical Education. Work will begin in 2008 on projects that focus on: investigating the private returns to VET; the degree of skills utilisation and mismatch by employed persons with VET qualifications; the role of VET as a choice for youth entering the labour market; and the role of VET regarding labour market outcomes for people with disabilities.

In 2009–2010, further research projects will investigate other key aspects of VET labour supply and the factors that motivate individuals to participate in VET. Research on VET will enhance the development of our national human capital agenda.

An international team of leading researchers from the Melbourne Institute, the Department of Economics at the University of Melbourne as well as from the Australian National University and the Economic and Social Research Institute in Dublin will work on delivering this important contract.

Melbourne Institute of Applied Economic and Social Research - Page �

Melbourne Institute Monthly Bulletin of Economic Trends

The monthly report, prepared by G.Lim, M.Chua, E.Claus and S.Tsiaplias from the Applied Macroeconomics research program of the Melbourne Institute, can be downloaded from our website, <www.melbourneinstitute.com/research/macro/bulletin.html>.

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A new monthly report, Melbourne Institute Monthly Bulletin of Economic Trends, provides forecasts of the state of the Australian economy. The monthly report includes forecasts of the growth in GDP, consumption and the unemployment rate as well as the outlook for inflation, the 90-day bill rate and the exchange rate. The forecasts are generated using econometric techniques which combine both historical information and forward information contained in, for example, consumer expectations, leading indexes of economic activity, and financial futures. The monthly updates of forecasts four quarters ahead provide timely ongoing information in advance of official quarterly data.

Highlights from the January report include:

Economic Activity Despite jitters in the global economy, the outlook for Australia is

good. GDP is estimated to have grown 4.1 per cent in December 2007 and some moderation is expected over the following quarters, to 3.4 per cent in September 2008. In line with overall GDP growth, the outlook for the states is also healthy; a rebound is expected for South Australia while some moderation in growth is anticipated for Western Australia.

•

Inflation and Financial Markets Underlying inflation as measured by the RBA’s trimmed mean measure of inflation was 3.4 per cent for the December quarter 2007. The Melbourne Institute forecast is that underlying inflation over the next three quarters will to be at or above the top-end of the RBA’s target band (with 90 per cent confidence bands of between 2.9 per cent and 3.8 per cent). In terms of individual price items, fuel and rent prices are likely to sustain inflationary pressure.

•

The Labour Market Conditions in the labour market are expected to remain favourable. Employment growth is forecast to rise to 2.8 per cent in March 2008 before falling to 2.6 per cent in June and September 2008. The unemployment rate is predicted to decline marginally to 4.2 per cent for the next three quarters. With respect to the states, employment growth in Western Australia and Queensland is expected to outpace growth in the other states.

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A Multidisciplinary View of Obesity

Obesity is rapidly becoming a major international health problem especially in the developed world. Obesity is about to overtake smoking as the major cause of disease and death and as such requires effective research and policy solutions.The key message from this Australian Economic Review Policy Forum is that obesity prevention cannot be tackled by employing the tools of any single discipline such as Public Health, Economics, Medicine or any single research methodology. Evidence is presented that multidisciplinary research synergies can teach us new things and order the way in which we decide to go about designing and implementing policy.

The Policy Forum makes the case for multidisciplinary research by bringing together the contributions of a selection of specialists from social science, statistics, public health and medical science from Australia and the United Kingdom, all of whom look at the same problem—obesity prevention—through very different disciplinary viewpoints, experiences and research approaches.

The article by Flora Douglas et al. is of a qualitative nature. It is based on semi-structured interviews with overweight and obese people. Its value stems from the intuition it provides about the perception that obese people have about their conditions. The article supports an emerging view that people perceive their obesity as part of their wider behaviours, lifestyles and circumstances, and not as a medical problem that could (and should) be dealt with in isolation of everything else that they do.

Kostas Mavromaras argues that it is useful and informative to study what motivates behaviours and lifestyles related to obesity. His article recognises the strong barriers to obesity prevention that are created by people’s everyday circumstances. It posits that formal microeconomic modelling can be used to develop and test hypotheses of individual behaviour under constraints, in ways that are informative to the more paternalistic public health model.

Rob Moodie argues in favour of pro-active state intervention to prevent the extreme suffering that the current obesity epidemic will inevitably produce in the future. He argues that health policy makers should not wait until the day comes when suffering that is stored up in today’s high levels of obesity becomes obvious to the individual. He uses a definition of market failure that is somewhat different to the conventional economic jargon used by Mavromaras.

Cate Burns shows how important economic and social disadvantage can be. She argues that choices faced by those in severe disadvantage can be forced to the degree that they resort to the cheapest food that can sustain them which turns out to be highly obesogenic. Simply put, when money is very short, obesogenic food is the clear way to avoid hunger, hence the higher rates of obesity among the disadvantaged.

Alison Avenell and Alison Goode review the evidence base for existing clinical and public health obesity interventions and find that the usefulness of data derived from randomised control trials has been limited. This is due to the lack of long-term follow-up data and the need to integrate the cultural, social and environmental aspects of obesity into research and evidence based recommendations on obesity. They argue that longitudinal data and research methodologies, more akin to those used by social science, should be supported and utilised.

“This Forum contains by no means a comprehensive list of all disciplines where synergies can be found. The difficulty with obesity prevention is that it is not just a medical problem. It has roots in many diverse aspects of modern life and, as such, prevention research should span across many disciplines. This Forum just highlights some of the more obvious multidisciplinary synergies that are there to be had. A lot more work will be needed in order to bring together the cultural, economic, social and environmental factors that may influence obesity prevention,” say the Editors of this Policy Forum, Alison Goode and Kostas Mavromaras.

Melbourne Institute of Applied Economic and Social Research - Page �

Australian Economic Review

The March issue of the Australian Economic Review (vol. 41, no. 1) contains a range of interesting articles, including a particular focus on obesity in the Policy Forum. Contributed Articles

An Analysis of FEE-HELP in the Vocational Education and Training Sector, Bruce Chapman, Mark Rodrigues and Chris Ryan

Tertiary Performance, Field of Study and Graduate Starting Salaries, Grace Chia and Paul W. Miller

Dynamic Properties of Income Support Receipt in Australia, Yi-Ping Tseng, Ha Vu and Roger Wilkins

Are Native and Non-Native English Speaking Tutors Equally Effective?, Akihito Asano

Policy Forum: A Multidisciplinary View of Obesity

Obesity as a Multidisciplinary Research Topic: Editors’ Introduction, Alison Goode and Kostas Mavromaras

‘Ask Me Why I’m Fat!’ The Need to Engage with Potential Recipients of Health Promotion Policy to Prevent Obesity, Flora Douglas, Joe Greener and Edwin van Teijlingen

Economics and Obesity, Kostas Mavromaras

Fat Is Good for Business, Rob Moodie

The Vulnerable and the Disadvantaged, Cate Burns

Assessing the Evidence Base for Interventions to Prevent the Further Increase in Obesity, Alison Avenell and Alison Goode

Data Survey

The CPI and Other Measures of Australian Inflation, Sarantis Tsiaplias

For the Student

Some Macroeconomic Implications of the Future Fund, John Freebairn

Editors’ Report 2007

To subscribe to the Australian Economic Review visit <www.blackwellpublishing.com/aere>.

The Melbourne Institute has recently reviewed its membership program to the Economics Forums in both Canberra and Melbourne.Members receive invitations to the quarterly luncheons held in Melbourne or Canberra and can receive subscriptions to the publications that are produced by the Melbourne Institute.

We offer three different levels of membership. Entitlements of membership are listed below.

Gold Membership

Attendance for four people at quarterly luncheons held in Melbourne or Canberra

A year’s subscription to each publication produced regularly by the Melbourne Institute

25 per cent discount registration for employees of the member organisation at selected Melbourne Institute public conferences

Associate Membership

Attendance for two people at quarterly luncheons held in Melbourne or Canberra

10 per cent subscription discount to any Melbourne Institute publications

Individual Membership

Attendance for a nominated individual member at quarterly luncheons held in Melbourne or Canberra

10 per cent subscription discount to any Melbourne Institute publications

Membership forms are available from the Melbourne Institute website <www.melbourneinstitute.com> or contact Penny Hope, Functions Manager, on 03 8344 2151 or <p.hope@unimelb.edu.au>.

Membership to the Melbourne Institute

Melbourne Institute NewsViews expressed by the contributors to Melbourne Institute News are not necessarily endorsed or approved by the Melbourne Institute. Neither the Melbourne Institute nor the Editor of Melbourne Institute News accepts any responsibility for the content or accuracy of information contained in this publication. Editor: Rachel Derham tel: 0� 8��� 2��8, fax: 0� 8��� 2���, email: r.derham@unimelb.edu.au. Sub-Editor: Nellie Lentini. Contributors: Dr Chew Lian Chua, Professor Guay Lim, Professor Kostas Mavromaras, Professor Tony Scott, Professor Stephen Sedgwick, Dr Sarantis Tsiaplias.

2008 Melbourne Institute Working Papers�/2008 – ‘Forecasting Australian Macroeconomic Variables Using a Large Dataset’ Sarantis Tsiaplias and Chew Lian Chua�/2008 – ‘Can Consumer Sentiment and Its Components Forecast Australian GDP and Consumption?’ Chew Lian Chua and Sarantis Tsiaplias 2/2008 – ‘The Determinants of Household Risky Asset Holdings: Background Risk and Other Factors’ Buly A. Cardak and Roger Wilkins�/2008 – ‘The Decline in Male Employment in Australia: A Cohort Analysis’ David Black, Yi-Ping Tseng and Roger Wilkins

Working Papers can be downloaded for free from <www.melbourneinstitute.com>.

Level 7, Alan Gilbert Building, The University of Melbourne P: (613) 8344 2100 F: (613) 8344 2111 www.melbourneinstitute.com

Upcoming ForumThe next Melbourne Institute Economics Forum will be held in April.Canberra – 29 April 2008; Hyatt Hotel, Canberra

For further details, please check our website <www.melbourneinstitute.com> or contact Penny Hope, Functions Manager, on 03 8344 2151.

New Staff in 2008Rezida Zakirova

In January, Rezida commenced as a Research Officer in the Labour Economics and Social Policy research program.

Peter Sivey

In February, Peter commenced as a Research Fellow in the Health Economics research program.