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Happy talk

Evan Davis | Vital Statistics |
20 Feb 07, 03:08 PM

The latest Consensus Forecasts have landed on my desk.

You might remember from a previous entry that Consensus Forecasts is a simple document that compiles all the reputable forecasts that are out there â€“ and ingeniously takes the average of them! I think of it as a very useful compendium of the general economic view of where the economy is going.

(As it happens, I also think that economic forecasts are of limited value as the periods that are worth forecasting - when the economy turns up or down - tend to be the periods that are most unpredictable.)

But that all being said, short-term forecasts have a value and Consensus Forecasts is the best way of seeing where we are. The interesting feature this month is that the forecasters seem to have been upping their dose of happy pills since last month.

The UK is now expected to grow 2.6% this year, not the 2.5% a month ago. The Eurozone is expected to grow 2.1%, not 2.0. But most striking, the US is now expected to grow at 2.7% this year, not the 2.4 previously reported.

In all three economies, the forecast growth of personal consumption has been raised. The odd thing about the change is that this was the year that the US and the rest of us began to converge, as the Eurozone grew faster, and the US slowed down.

Now, it seems, economists are postponing that convergence. It seems they think the golden scenario prevalent over the last few years has another year to run, and the US can continue to outpace everybody else.

Given the momentum in the world economy at the moment, economists are probably right. But at some stage, doesnâ€™t it seem like the US has to slow down?

Comments Post your comment

1.
At 04:38 PM on 20 Feb 2007,
Mark wrote:

Evan,

It always used to amaze me, given how many UK macroeconomic forecasting models (from academics, the City or consultancies)used the HMT model at bae and 'tweaked' it this way and that ever so slightly, that we saw much variation between forecasts at all!

2.
At 11:20 AM on 21 Feb 2007,
Brian wrote:

Hi Evan
It's all pretty small scale though isn't it? I mean it's tenths of a percentage point. And yet it's these kinds of changes which seem able to alter all sorts of things (eg optimism about the economy etc) and most importantly for millions of people how much they pay in their mortgages. For this fine -tuning of the economy wouldn't it be better if there were more subtle methods than making people feel more or less hard up each month?

And come to that... if EVERYONE took out five-year fixed rate mortgages, wouldn't that blunt the Bank of England's ability to manage the economy by interest rates?

3.
At 02:14 PM on 21 Feb 2007,
Albert Hall wrote:

I've been reading a lot about bad loans, sub-prime defaults in the US, looking at the BoE broad money stats, observing the way GDP, CPI, and 'growth' is calculated. Current account and trade defecits, personal insolvencies, unregulated lending practices and very creative accounting.

I've looked into the derivatives markets, hedge funds, private equity. I've seen some bad margin calls brewing in some metals, and a few bubbles going pop here, a few getting bigger there.

Evan, i'd say it was happy pills...

4.
At 07:20 PM on 21 Feb 2007,
neil wrote:

I find it interesting that the growth rate of personal consumption in the US has been raised. There is a negative saving rate and the mortgage equity withdrawal that has been the real source of consumer spending over the past several years has been reduced substantially by the fall-off in demand for real estate at its current over-inflated prices (particularly on the coasts).

Forclosures are rapidly increasing, many more new homes and condos are close to completion, subprime lenders are filing bankruptcy in substantial numbers (even HSBC is being hit by the sudden surge in defaults).

This is all obvious to anyone with the ability to look at the trends, so why the reports miss it is entirely beyond me.

5.
At 01:18 PM on 23 Feb 2007,
Rory Anderson wrote:

Part of the reason for the growth differential between the US and the Eurozone is the higher population growth in the US. The per capita growth differential is smaller.

6.
At 04:58 PM on 29 Mar 2007,
Lossaversion wrote:

What is the discount for optimism bias - I have never ever come across ecoonmic forecasts that predict gloom and doom - however what we tend to see is dissonance on a grand scale and we act all surprised and shcoked when it hits the fan and we run around looking for someone to blame e,g hedge funds, poor quality lending etc

Post 3 highlights that the form of macro forecasts belies the substance of micro data and as always the two never reconcile because of dissonance.

When things go wrong hindsight bias kicks in and we all identify the cause of the problems but then when problems were noticed at the time why was there no action - answer dissonance.

Sad to say and history supports this -when things go awry there is not a lot regulators, governments or markets can do about it - the only thing that can be done is give the impression that something may/will/is being done i.e status quo bias prevails and we forget all the problems and their causes until the next time the same problems arise.

Dissonance + loss aversion + status quo bias = plus ca change, meme la chose