UK News

from MacroScope:

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.

from MacroScope:

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.

from MacroScope:

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.