In the UK, things are looking much brighter than they have for some time. The IMF recently improved its forecast for UK GDP for 2013 from 0.9% to 1.4% and for 2014 from 1.5% to 1.9%. That’s a big move, and compares to the consensus (compiled by the UK government) of 1.3% as of last post.
Are these forecasts realistic? Well, we know from official data that the UK economy grew 0.3% in the first quarter and 0.7% in the second. Figures for the third quarter have yet to be released, but NIESER’s estimate, widely respected as a predictor of official data, printed 0.9%, for a year-to-date total of 1.9%. If that’s anywhere in the ballpark, real GDP would have to FALL in the fourth quarter to get to the forecasts. That just doesn’t seem realistic – if anything, UK growth appears to be accelerating (and clearly positive anyway).
But why the pessimism?
So why do economists continue to publish forecasts for 2013 that seem at least one percentage point too low? Is it because forecasts are published relatively infrequently? Perhaps, but there is nothing to stop the forecasts from being published more regularly if the tipsters wanted to too. But they don’t, and here’s why. As a trader, you can usually change your position or your short-term vision to the very short-term, without having to tell the world. Sellers have less flexibility, but can change their call from day to day as the markets move back and forth.
But as an economist or analyst, your call is advertised to anyone in the world who is interested in hearing it, and if you’re old enough, you may find yourself discussing it on CNBC or Bloomberg. You cannot credibly move your forecast to one side and then back to the other, without losing credibility, regardless of what your model tells you. Successful moves in forecasts look best if they go in the same direction. As such, they are generally “behind the curve” relative to market prices.
Facing forward
This helps explain why some central banks have trouble getting someone to believe their future directions. In many cases, the GDP forecasts seem too conservative, for all the above reasons. This is compounded by the fact that several, including the Bank of England, have attached ‘terms and conditions’ to their guidance, which have been widely interpreted as a way out.
To conclude, the forecasts are behind the curve, and more than normal due to the inflection point.