Economic Forecasting
It seems like recently, economists have been so wrong with their predictions regarding numerous facets of global finance. Emerging markets have yet to drive global growth, interest rates still haven’t risen and oil is not nearly the price that is was thought to be at this point in time. These trends have proved that the job of an economist is only getting more difficult.
An explanation for this could be the increased participation of markets and investors playing a bigger part in driving the global economy. Volatility is something we all know too well today and this increased participation has led to piling more money under management that has numerous commodities, governments and other sectors around the globe becoming tied to the performance of markets.
"The dominance of finance has made economic volatility the new normal." - Roger Altman
While many, including the International Monetary Fund and Federal Reserve projected global growth to accelerate, it did the exact opposite and the big headline these days is slow global growth lead by emerging markets that have gone into recessions. Another big miss includes the federal funds rate, which was projected to be around 4% but also missed expectations as it stands at 0.5%. Forecasters also claimed that oil demand would be strong throughout however, that did not prove to be true.
These categories in the past haven’t been the hardest ones to predict for economists. However, an explanation for oil prices could be that oil is more of a financial instrument in the present day. It acts like gold and sees the same type of volatility in the stock market, especially short term volatility.
Short term volatility is making the economic horizon extremely unclear for forecasters. There is more pressure now than ever before for upper management to focus on the now and deliver good quarterly earnings that result in share price movements, losing sight of the long term.
Has finance become too powerful that economic forecasting is a thing of the past? Can performances be forecast when corporations forget about long term results?
bump
Nice bump on your own post lol
I think emergence of China is muddying the waters, because they are a giant source of irrational economic participant in the global economy: they are importing tremendous amount of commodities that are used to build ghost towns and companies that would've been liquidated already are producing stuff at below-rational prices and dumping it to the global market. Also the communist regime is announcing a 6% growth, when in fact it should be probably lower. Also Chinese banks, which are effectively government-run banks, are forgiving loans made to Venezuela and other African nations which should have went into default. But we know through common sense and history that this is not sustainable.
This gives a false sense that the emerging markets are doing well and Chinese-produced dumping goods are artificially keeping the inflation low across the globe. Also it is giving rise to artificially high demand which is not sustainable. Once China behaves rationally, which is the basic assumption in any economic textbook except for the communists, economists' forecasts will be become much more accurate.
Everything now is driven by the macro factors. Central Banks are the primary drivers, but not in the way that they intend to do so, but instead in the way that investors are placing their money based on what they think the central banks will do. Using Brexit as an example and the immediate drop in the markets for 2 days, followed by 3 days of recovery to par. Do some research on what actions the global central banks took in that time period. You will be surprised by the direct intervention and the coordination that took place.
Mostly because economists started thinking they could apply the scientific approach to economics, employed mathematicians, scientists etc. and increasingly quantitative models. This wasn't bad per se, but they forgot they were still in the field of social sciences and reduced economics to the quantitative element. Most models still rely on conditions that do not apply in reality, resulting in the spectacular failure of macroeconomic predictions.
Never thought of it like that but it makes total sense to me now...great point.
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