ECB deflation risk denial has echoes of 2009

Euro zone policymakers like to talk. They often contradict each other at separate speaking engagements on the same day. But they have struck a chorus in recent weeks, asserting that deflation is not a threat.

Members of the ECB Governing Council have been particularly vocal, insisting they will not have to alter policy to counter falling prices.

Jan 9: Mario Draghi says the euro zone may “experience a prolonged period of low inflation” — steering clear of even mentioning the word deflation.

Jan 21: ECB’s Ewald Nowotny says “we neither see inflation nor do we see deflation in the euro zone”.

Jan 23: Draghi says “the risks of deflation or inflation are limited at this point in time.”

The euro zone: choose your own adventure

Forecasts about the future for the euro zone economy are starting to resemble a multiple-choice novel. Are you an economist working for an Anglo-Saxon institution? Then turn to p.65 — “Recession for the euro zone”. A German bank? Go to p.80 — “Happy days are here again!”

That simplifies the case slightly, but there’s more than a grain of truth in it. We’ve noted repeatedly that predictions about the euro zone are coloured heavily by whether someone works for an employer based inside the currency union or not.

In the past, analysts have been reluctant to forecast outright contraction for major economies.

High-flying economic indicators

At a meeting of the National Association for Business Economics in Dallas,  discussions on the economic outlook turned so gloomy at one point that a  well-known economist was heard to say he’s inclined to sell everything and  “just buy a gun.”

Herb Kelleher, Southwest Airline’s co-founder and chairman emeritus,  offered a different view when he addressed the group on Monday. As it turns  out, although Kelleher majored in English (with a minor in philosophy), he has a favorite economic indicator too. Advance airline bookings, he said, say more about the economic outlook than is widely understood – in fact, he  said, for years the large department store companies used to call him in early  December to check on bookings so they could predict what kind of a Christmas selling season they might have. Asked what bookings look like today, he said:

I’ve been pleasantly surprised by the number of bookings and the revenue per available seat mile. What scares me is that it looks pretty good this month, but I haven’t any idea of what it looks like next month.

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.

worldcup.jpgIf 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.

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.

Has Bernanke got it right?

“Don’t fight the Fed” is an ingrained financial markets axiom and hence, when Federal Reserve Chairman Ben Bernanke speaks, investors, traders, analysts, economists and fund managers pay attention.

Bernanke testified in Congress on Tuesday and one key message was that the recession should end this year.

German fund managers Mack & Weise (M&W), however, were not impressed.

“That Fed Chairman Ben Bernanke once again takes a fundamentally positive view of the U.S. economy should rather be understood as a warning. Not … a single one of Bernanke’s forecasts in recent years has proven right,” M&W said in a note to investors.