Walking, talking ECB leading indicator
German Bundesbank President Axel Weber is developing a reputation as a leading indicator for the European Central Bank.
In the same way as a pickup in confidence can foreshadow a pickup in the economy, Weber’s comments about the direction of ECB policy this year have tended to be borne out by events.
The ECB’s broad hint on Nov. 5 that it will drop its super-long, one-year loans to euro zone banks next year follows a similar suggestion by Weber a week earlier.
And earlier this year, the 52-year-old publicly argued (and succeeded) for the ECB not to cut its main interest rate below zero, or follow other central banks in adopting a massive asset-buying programme.
Some economists wonder whether Weber – seen along with Italy’s Mario Draghi as an heir apparent to ECB President Jean-Claude Trichet in 2011– just dares to say publicly what others are already thinking, showing little regard for the unwritten rules that make Trichet the official barometer of ECB opinion.
But others say Weber’s record this year shows he is successful at convincing others to follow his lead. A former academic, he can talk eloquently about the nitty-gritty of economic analysis and as the representative of the euro zone’s biggest economy and banking sector, his opinion carries weight.
“When Weber speaks, the market does tend to listen,” says Societe Generale economist James Nixon, a former ECB staffer.
How good are economists at forecasting CPI?
Market economists are taking a pasting worldwide for not predicting the global financial crisis. But how good is the profession at more bread-and-butter tasks, such as forecasting economic data?
In Australia, Reuters surveys 15-25 economists ahead of each quarterly CPI figure. A check back over analyst forecasts for the past 17 years shows:
- the median forecast mostly gets the direction right, but tends to miss the highs and lows of the cycle
- the median forecast is pretty close about half the time
- but about a quarter of the time it’s well off the mark
- and of those — about 10 percent of the time — it’s not even close
Forecasts matter because financial markets closely watch surveys of analyst expectations for major data, and the consensus forecast is priced into the market well before official figures are released. So any big swings in the exchange rate or bill prices on the day are usually due to whether the result matches expectations, rather than the figure itself.
Comparing the median forecast with the actual outcome produces a table that looks like this.
Economy: Getting better or just less bad?
In much the same way that analysts have been debating whether equities are in a bear market rally or a new bull market, economists now have to deal with the question of whether the global economy is just bottoming out or is now actually recovering. The two things are obviously linked as BlackRock equities chief Bob Doll indicated when he said this week that equity markets will require the economic backdrop to actually improve rather than simply grow less bad if rises are to be sustained.
The less-dreadful-than-feared syndrome has been around for some time. U.S. markets, for example, found themselves cheering the loss of 539,000 jobs in April simply because its was the smallest since October and looked to be an improvement.
But talk of green shoots, a somewhat overused euphemism for the start of economic revival, has also been on the increase: European Central Bank President Jean-Claude Trichet spoke on Monday about the pick-up in GDP evident in certain areas; China said its efforts to boost growth were working; and a lot of institutional investors are acting as if the worst is over.
So, bottoming out or on the way up? Comments below please.
(Reuters photo: Danish Ishmail)
A question like this is has such a complex background to it but everyone knows the answer. Funny how we can all know it but not express it in raw terms, in some way we are hesitant to see how far the ride will go. Let’s see if I can express it effectively for American’s, who are sadly the one’s that have borne the brunt of this thing. In Yosemite Nat.Park, for years Wolves were killed because they were considered a menace to the environment. Flora and Fauna were nothing like the descriptions given by your President Roosevelt we he first saw it. Upon recent reintroduction of wolves, within a few years things have started to take off like you wouldn’t believe.
Now some of you are wondering what’s this got to do with the economy. Well the economy is an environment that has lost it’s biggest predator, banks. You may hate them like wolves but the economies of the world grew as they were a part of it and just like nature when one species gets ahead of itself, it’s resources are then effected and they begin to die off. It takes time for things to naturally return to “normal” but knowledge and not greed; it’s efficient application, is what can help turn things faster, we have that capacity. I have been though my crisis that almost sent me bankrupt but through learning and action I have now exited the path I was on. My hopes are with everyone else that you too can correct your path. Each little effort will help everyone in our economic environment.
