What have a trillion euros done for the economic outlook? Not much yet
The trillion euro sugar rush that made Q1 the best start to the year for global stocks in more than a decade has already worn off, but what is most striking is not how quickly it ended. It’s how little the economic outlook has changed.
Cheap central bank money mainly seems to have boosted stocks and the optimism of stock market forecasters, who generally are the most bullish of the lot with or without wads of cheap money.
An analysis of Reuters Polls over the past three months, starting just before the European Central Bank made the first of two gargantuan injections of cheap three-year money into the banking system, reveals what many have fretted might happen.
Derived from professional market forecasters and economists, they showed that the cash would probably do a lot to push up asset prices in the short term but do little to help a stalled euro zone economy with rising unemployment.
The consensus for Q1 euro zone GDP has stagnated at a quarterly contraction of 0.2 percent in the past three monthly Reuters polls, starting from the December poll, taken before the ECB’s first of two long-term refinancing operations (LTROs).
Over the same period, the outlook for 2012 growth as a whole deteriorated from none at all to a mild 0.3 percent contraction.
Frankfurt’s DAX had its best Q1 since 1998, up a staggering 18 percent. European shares more broadly rose 7 percent – still, the kind of return an investor might hope to get during a good year, not three months.
from Anooja Debnath:
When it comes to recessions, 40 is the new 50
If it were about age, 40-somethings would cringe. But it seems a dead certainty that 40 now means 50 -- or even higher -- when it comes to predicting the chances of a recession taking place.
Going by past Reuters polls of economists, every time the probability hits 40 percent, the recession's already started or is perilously close to doing so.
After the brief recovery period from the Great Recession, Reuters once again started surveying economists several months ago on the chances of developed economies stumbling back into the muck.
As the data get nastier and euro zone politicians wrangle over the sovereign debt mess, the probability goes higher. Just not high enough or fast enough.
The probability that Britain slides back into recession hit 40 percent in the Reuters poll this week, up from one in three last month.
The last time that happened was in July 2008, a few months before U.S. investment bank Lehman Brothers collapsed. The British economy contracted by 2 percent that quarter, its second contraction of 2008. And we all know what happened next. If 40 is the new 50, we're in it.
"It is a very big thing to say we are going into recession ... it is one of those things people are cautious sticking their necks out about," said Alan Clarke, who said there’s a 75 percent chance of that happening.
Philly Fed – the nightmare index economists can’t grasp
“Horrendous”
“Stink”
“Meltdown”
These are just a few of the (printable) words analysts have used to describe the August release of the Philadelphia Fed’s factory activity index.
And well they might — the Philly Fed has proven to be a nightmare indicator for economists. At -30.7 in August, the index came in far below the consensus forecast for a rise to +3.7 from July’s +3.2. Even the lowest forecast was only -10.
That’s probably one of the worst misses the Reuters polling team can recall in recent memory.
For three out of the past four releases, the Philly Fed number has come in below even the lowest forecast from dozens of economists. But that August result is something else.
The perils of predicting BoE policy
As we’ve noted extensively, economists often get it wrong. Leaving aside their collective failure to recognise an impending global recession, you might recall a shock interest rate hike from the Bank of England in January 2007.
This was another event that almost every economist polled by Reuters failed to spot, and there are signs that four years on, economists might be setting themselves up for a similar shock.
The consensus from the last Reuters BoE poll last week showed interest rates would stay on hold into the fourth quarter, even though UK money markets have priced in a 100 percent chance of a rate hike by May. Since the January meeting, some of the bank’s Monetary Policy Committee members have publicly stated their determination to fight strong inflation.
But going back to January 2007, the only analyst out of the 50 polled by Reuters who predicted that shock rate hike was Simon Ward, chief economist at Henderson Global Investors. If the MPC does indeed flay analysts’ consensus this year by hiking rates before April, he stands to repeat his 2007 feat by being the only economist in the last poll to forecast a hike in the first quarter.
“I have been a bit mystified as to why other people haven’t shifted (their views) as inflation figures have really shot up over the last few months,” Ward told Reuters.
He suspects a somewhat dovish speech last month from BoE Governor Mervyn King wrong-footed economists, based on the presumption that King wouldn’t have sounded so dovish unless he was confident that rates would stay on hold for a long time.
“I think that interpretation was incorrect, and King has been outvoted in the past. It’s not like the U.S., where there’s a certain amount of pressure to follow the chairman’s lead,” said Ward.
Economists vs the zero barrier
Anyone involved in financial markets on a day-to-day basis will be familiar with bits of jargon like “breaking the psychological barrier”, “passing key resistance levels,” and even “magic numbers”.
While academics might argue if such things exist, market players put a lot of weight (and money) on the way certain financial instruments, indexes and currencies seem to behave near a certain number – usually a round figure.
Economists, looking months and years into the future to predict the path of entire economies, could well declare themselves immune to the superstitions of daily market movements.
But they too are victims of the psychology of round numbers – or to be precise, zero.
Take Tuesday’s shock preliminary UK GDP figures, which at -0.5 percent came well under even the most pessimistic forecast for +0.1 percent growth.
It’s always easy to say in retrospect, but there were some clues that a below-zero figure might have been on the cards. PMI surveys two weeks ago showed Britain’s service sector, which makes up the bulk of the private economy, declined unexpectedly in December, as did the construction sector. Retail sales figures for last month were also dire.
Still, no economist was willing to break through that zero threshold – and not for the first time.
Banking on a Portuguese bailout?
Reuters polls of economists over the last few weeks have come up with some pretty firm conclusions about both Ireland and Portugal needing a bailout from the European Union.
Portuguese 10-year government bond yields have hovered stubbornly above 7 percent since the Irish bailout announcement, hitting a euro-lifetime high and giving ammunition to those who say Lisbon will be forced into a bailout.
And of those who hold that view, it’s clear that bank economists have been most vocal in expecting Ireland and Portugal to seek outside help.
Take last week’s poll in which economists said Portugal would follow Ireland in applying for EU funds. Bank-based economists who expected a Portuguese bailout outnumbered those who didn’t almost three-to-one. For non-bank economists – those working at research houses, brokers and wealth management firms – the margin was only two-to-one.
This division was even more marked in the Irish bailout poll we ran three weeks ago. Bank-based economists expecting an Irish bailout outnumbered those who didn’t more than two-to-one. Our sample of non-bank economists were split almost evenly on the subject.
Interestingly, market makers and primary dealers – or banks mandated by government debt agencies to deal their new government bond issues – were staunchest in expecting Irish and Portuguese bailouts.
Of the seven economists polled by Reuters who work for primary dealers of Portuguese debt, six said Lisbon would need to apply for a bailout. For analysts representing primary dealers of Irish debt, four out of five said a bailout was imminent.
The octopus and the economists
What do an eight-legged creature in an aquarium in Germany and 74 economists have in common? The consensus view that Spain would claim the World Cup — until the economists, as they so often do, changed their minds.
If World Cup 2010 goes down as one of the most unpredictable and exciting competitions in recent history, bringing underdogs Holland and Spain to the final showdown, what was hopelessly routine was watching so-called expert opinion converge around the safest bet. At least among financial professionals, who have done so well of late predicting the future.
When Reuters first surveyed economists and forecasters in May on which team would be kissing the golden grail on July 11, 2010 in South Africa, it made for interesting reading. Spain would take it — by a narrow margin, it has to be said — followed by Brazil, Argentina and England. Improbable probability analysis, perhaps, but not boring.
Then as various teams got knocked out of the competition — former champions Italy, France, and England — in a miserable and well-deserved defeat to Germany, Reuters re-polled these same economists and a few more for good measure. And that’s when they fell flat. Those brave forecasters slipped back to the easy choice, and as a group they picked Brazil. We all know what happened to them.
It’s hard enough to accurately predict where GDP growth is headed, where a currency will trade, or where interest rates will go, let alone who’s going to win a major sporting tournament. But what the economists should have done was go with their gut and hang on to their convictions instead of revising their views with each little new development, as they so often do.
But for all those last-minute changes, it has to be said the economists were better at it this time around than in 2006. Back then, fewer than 10 percent of them predicted Italy would win — about the same proportion who managed to predict the biggest financial crisis in generations.
I still think the octopus just prefers broad, high contrast, horizontal stripes. Then again, it’s probably just as sound as the economists’ reasons….
Very nice. I showed this video to my teenage son to give him an idea of how our economy works and what the different opinions are about how it should work.
It sparked his interest and hopefully will result in him looking some things up for himself so that he can understand them better.
U.S. recession’s ending. Now what?
The latest Blue Chip survey of economists is out this morning, and there’s general agreement on one point: the longest recession since the Great Depression is about to end, if it hasn’t already. Some 87 percent of the economists surveyed thought the National Bureau of Economic Research will eventually declare the recession ended prior to the end of September.
What happens next is up for debate. The survey found that about 16 percent expect a strong V-shaped recovery. An equal percentage expects a W-shaped double-dip recession. Most economists — about 65 percent — were lumped in the middle, looking for a long, slow U-shaped recovery.
They also seem to think that last Friday’s jobs report, which showed the jobless rate dipped for the first time in 15 months, was just a head-fake. The consensus view is that unemployment peaks at 10.2 percent, compared with the current level of 9.4 percent, and nearly half thought that level would be reached in the first quarter of 2010.
So, what’s your take? Pick a letter, any letter, but if you choose something other than L, V, U or W, you’ll have to explain it.
in reply to the guy that says ‘what do they know’ and says that these economists didn’t predict the recession.. some didn’t but one of the economists that was part of this poll definitely did – and he predicted it exactly: Nouriel Roubini – he’s one who is predicting a double dip recession. What I’d ALSO like to point out – so far these economists were dead on about unemployment.. they said it would peak at 10.2% and so far the signs say they were dead right – actually if it doesn’t double dip – they were uncanny with that prediction… so folks, they aint as dumb as you think.. you’d do well to pay attention. Myself I still think we will have a sluggish V recovery but not a double dip – but I’m just an optimist.. not an economist
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.
Cheap central bank money mainly seems to have boosted stocks and the optimism of stock market forecasters
houch!!
the problem is that this money must be repaid in three years
look to market capitalization of spain italy portugal ecc..
in europe there is a lot of people with losses of 30 50% on share prices in their portfolio “wealth effect” is a good boost for consumers investors ecc.