MacroScope

High inflation is a drag on economic growth in the world’s second most populous country and matters immensely to over 400 million people, or over a third of India’s total population, who struggle to earn enough to feed their families three meals a day.

The particularly volatile nature of inflation in India has confounded policymakers and small business owners and has left economists, who are often running complex statistical models based on a dearth of reliable data, with a poor forecasting record.

To be fair, predicting economic data can be pretty tough in a country where collecting and reporting national statistics is still in its infancy stage. Provisional numbers are often completely revised away.

The latest sharp revisions to historic gross domestic product data, which show that India’s economic performance during the aftermath of the global financial crisis was worse than previously thought, is just one recent example.

Economists have underestimated the pace of monthly wholesale inflation 17 times over the past two years, according to an analysis of Reuters polls.

The pension grabs by austerity-averse governments in Poland and Hungary could impact this year’s planned reforms in the Czech Republic, causing another emerging European Union member to soften its approach to a looming debt threat tied to an aging population.

Budapest has already drawn criticism for right-wing Prime Minister Viktor Orban’s plan to seize $14 billion of assets in privately held pension accounts to plug a budget hole without having to cut state spending. Poland’s plans, while not as extreme, have also raised eyebrows. Poles now pay about 7 percent of their paychecks into private accounts, but Prime Minister Tusk is planning to cut that to about 2 percent, taking the extra cash to reduce debt and replacing those funds with future state obligations.

To their credit, all three countries are among a group of nine who have lobbied Brussels, without much effect, for big exemptions to their pension reform costs. But while using funds designated for private pension accounts will cut the budget deficit in the short term, economists say it is only a trade-off between replacing short-term deficits with future pension costs, a good way for governments to stay popular but bad for long-term financial health.

As the German election approaches and with it a chance he may not hold onto his job, Finance Minister Peer Steinbrueck took a long shot this week to try and boost his legacy as the man who took on the tax dodgers and won. While some of the new rules he proposed in a now trademark campaign against tax fraud failed to pass, the 62-year-old Social Democrat can only have boosted his popularity with voters and upped his chances of holding onto the Finance portfolio after the September 27 vote.

The idea was to give the Finance Ministry a “free hand” in drawing up its own list of countries and jurisdictions it deems uncooperative in efforts to crack down on tax evasion. Finance would thus have a bigger stick to wield as it signs new bi-lateral tax agreements next year, since the threat of sanctions on operations in Germany would have been immediate and easier to execute without the hurdle of consensus in Berlin. Or so the thinking went.

The proposal managed to stand its ground for a day. After supporting the plan on Monday, the Finance Ministry was forced to retreat under a hail of criticism from business lobbies, and when cabinet outlined its new procedures on Wednesday, it was clear that any future sanctions decisions will also have to be agreed by the Foreign and Economy ministries.

People packing their bags and flying out to St Petersburg, Warsaw, and Prague this summer may not just be seeking an exotic vacation spot.

International property investors are inching back to emerging Europe, lured by prospects of higher returns in markets such as Poland, whose economy has held up relatively well in a global downturn, and Russia, which is bolstered by rising crude oil prices.

After posting strong growth for over 5 years, commercial real estate investments in emerging Europe had been a washout after Lehman Brothers’ collapse in Sept ‘08, with first quarter sales hitting a record low.

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.

The International Monetary Fund’s bumbled calculations on the financing needs of some eastern European countries revealed last week were met in Austria with disbelief, ridicule but also a quiet smile.

The IMF said it had overstated external financing needs of some countries in its Global Financial Stability Report, released on April 21, largely because of double-counting errors. The corrections have trickled in.

Worrying reports earlier this year indicating west European banks had lent $1.7 trillion to IMF-bailed-out states like Ukraine and Hungary worsened a steep selloff in the region’s assets. Policymakers lashed back at the time, saying the fear was blown out of proportion.

The European Central Bank has cut interest rates to a record low of 1.5 percent and although it’s expected to cut further to 1 percent by mid-year, this still means benchmark borrowing costs in the euro zone will be higher than the UK, the US, Canada and Switzerland, where official rates are already at 0.5 percent or lower.

But euro zone residents are actually enjoying more favourable credit conditions than the ECB’s “official” rate, the main refinancing rate, would suggest. 

 The Commerzbank branch opposite the ECB’s Frankfurt headquarters is offering mortages at a five-year fixed rate of just over 3.5 percent,  two percentage points cheaper than the average cost just a few months ago.  This is partly because the ECB, in addition to cutting rates, has flooded money markets with liquidity, meaning banks can borrow money amongst themselves more cheaply than the official benchmark rate.

The financial crisis is causing people to do some funny things, but when the head of one of the world’s biggest central banks looks down the lens and tells people to stop being so cautious and go and spend, spend, spend, you know something strange is going on.

Despite European high street stores offering up to 90 percent off, rattled Euro consumers have reacted to the financial crisis by slamming the brakes on spending.

It is not exactly an irrational response. Jobs are being slashed at an eye-watering rate and savvy shoppers know that, as stores become ever more desperate, there is a good chance the
must-have jeans, gadget or new car they have been eyeing may be even cheaper in a few weeks.

Was letting Lehman go down the biggest mistake of the crisis? Many, including George Soros in the Financial Times, have argued that letting Lehman go down sowed panic to markets, consumers and businesses.

Not so fast, says Harvard historian Niall Ferguson, in an interview in Davos:

"My position is this is a typical error of historical understanding in which a single event is blamed for much more than it can possibly have caused. You can say ‘Hank Paulson is to blame for my troubles' and if you can change one thing in the story it would have a happy ending.

It's like saying if only Princip had not shot the Archduke Franz Ferdinand in 1914 there wouldn't have been a First World War.