If anyone needs a definitive confirmation that when it comes to predicting the future, "expert economists" are not only completely clueless but always approach the future with a baseline of endless and unquestioned bullishness, which in the past decade has ended up being humiliatingly wrong, we present the following charts from Deutsche's Jim Reid, showing the jawdropping cumulative error rate in GDP forecasts in the past decade among those countries that make the headline news every day.
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What do the charts show: in the 9 years since the first forecast in October 2003, these 6 countries are 20.5% (Italy), 16.9% (Spain), 10.4% (France), 3.7% (Germany), 11.3% (UK), and 15.8% (US) behind on a cumulative basis what economists forecast back in 2003! This forecasting error has become more severe since the crisis begun. Since October 2007 (i.e. for the 5 years between 2008-2012) we are 16.4% behind cumulative forecasts in Italy, 18.1% in Spain, 10.6% in France, 7.0% in Germany, 14.7% in the UK and 10.6% in the US.
If there is any more damning piece of evidence that all those well-paid economists who are paid to see the future are thoruoughly clueless, than the above, we would love to see it.
How about looking at just the epicenter of the collapse of the Keynesian utopia: Greece? While we have shown this data previously in various iterations, this chart is just hilarious: it shows the actual GDP rate and the 1 year prior forecast.
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Taking the same shorter-term approach as in the chart above and applying it to the original six countries, i.e., the future GDP forecast from Q4 2011 and comparing it to actual outcomes, shows something just as dramatic: virtually every country has seen massive misses to a forecast as recent as 1 year ago, except for the US, which at least for now is trending more or less as expected.
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From Jim Reid:
With the exception of the US, the other five countries in our sample have seen significant to large misses relative to expectations over the last 12 months. The scale of the misses, especially as there were no abnormal shocks in the year only austerity, has to mean that there should be a fair degree of uncertainty as to the path of the European economy in 2013, especially in Spain and Italy. This cycle is not behaving very well relative to expectations and it’s a big call to predict the start of a sustainable turn around in 2013. If it does come then we'll likely see a significant sentiment boost. However if it doesn't materialise and growth is still negative as we move through Q2 and into H2, then it’s not inconceivable that we could see a resumption of solvency concerns in Europe, even if the ECB were buying bonds at the short-end.
The market might conclude that something more radical might be needed to be done to put certain countries’ finances back on a surer footing. A sell-off in longer maturity bonds might be the result of this pressure. At this point the ECB may again take centre stage and the pressure for full QE, across all maturities of bonds may build. Before this there is every chance of more market stress and risk-off as debt sustainability is doubted.
Maybe much depends on the understanding of austerity and fiscal multipliers and this will continue to be a big debate in 2013. On this it was interesting that the IMF have recently raised a flag that they may have under-estimated the size of the fiscal multiplier, especially in the post-GFC world.
Thank you DB for confirming that economists are about as insightful at forecasting the future (and reality) as a perfectly credible coin toss.