10 Jan 2013

Evidence continue to accrue that the forecasting of economic and financial data is becoming increasingly difficult. There was a period of time in the mid 90s to early 2000s where the economies of the major OECD countries were relatively benign (the “tech wreck” not withstanding) and economic forecasters had a relatively easy time – not that the pundits could be relied on to forecast financial markers such as exchange rates, interest rates or stock markets but it was ever thus.

Since 2007 however, even the economic forecasters have been thrown considerably off course, with few if any of the major players being able to estimate with any degree of accuracy the macro indicators such as GDP growth, inflation or unemployment.

It would seem that this is due to the developed economies being now in relatively uncharted waters with interest rates in most of the major markets being at or near zero, with little known (and understood) monetary policies of quantitative easing and with government fiscal policies being applied in an increasingly haphazard fashion. As this article in today’s Business Spectator points out: the IMF, the European Central Bank, the World Bank and the US Federal Reserve have consistently overestimated the performance of most of the European and US economies over the past few years.

One of the major difficulties is the impact of confidence – or lack of it. So much of an economy’s economic performance is driven by underlying consumer and business confidence that without an accurate gauge of confidence levels, most forecasts are little more than guesstimates. Until such time as confidence does pick up, expect the majority of economic and financial forecasts to err on the optimistic side.