A pitfall or three in forecasting

Last week the IMF released its latest World Economic Outlook (WEO) in time for its spring meetings with the World Bank. The media seized upon the forecasts and commentary for what we might term easy copy. Anybody who has been a journalist knows that press releases and report launches are a comfortable alternative to investigative research. At the same time, anybody who enjoys political power knows that the IMF’s forecasts still carry weight.

So the UK government hailed the fact that the WEO has the UK as the second fastest growing G7 economy in 2017 (after the US). If the Fund’s forecasts had told a more negative story, as they had before and directly after the referendum on EU membership, the government would have tried to pick them apart. Sovereign downgrades by ratings agencies can produce a similar response. The French government was not happy with the downgrade to AA by S&P in November 2013 and said so publicly.

Political posturing aside, there are several reasons to be wary of the forecasting industry. Firstly, there is the use of forecasts as a marketing exercise, a good example being the call for crude oil at US$100/b by a well-known investment bank. Secondly, there is their use with bonds, for example, in support of a bank’s trading position. We will not enter the litigious territory of giving an example.

A third criticism is their chequered record in terms of accuracy. We should be particularly careful when the industry shares the same position. This is neither a macro nor an asset variable but it was striking how all large financial institutions got the result of the UK referendum wrong. It may have been laziness on their part, or it may have been a failure by analysts to take the temperature outside London and south-east England. Whatever the reason, it was embarrassing. A safer alternative would have been to construct scenarios around the two possible results rather than try to call the outcome of the vote.

Gregory Kronsten
Head, Macroeconomic & Fixed Income Research

Source: Business Day, 24 April, 2017.
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