In the UK, things are looking a lot brighter than they have for some time. Recently the IMF upgraded their UK GDP forecast 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 (as compiled by the UK government) of 1.3% as of the last publication.
Are those forecasts realistic? Well, we know from official data that the UK economy grew by 0.3% in Q1 and 0.7% in Q2. Q3 figures have yet to be published, but the NIESER estimate, widely respected as a predictor of the 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 Q4 to get to the forecasts. That just doesn’t look realistic, if anything UK growth appears to be accelerating (and in any case, clearly positive).
But why the pessimism?
So why are the economists continuing to publish 2013 forecasts that look at least percentage point too low? Is it because forecasts are published relatively infrequently? Perhaps, but there is nothing to stop forecasts from being published more regularly if forecasters wanted too. But they don’t, and here’s why. As a trader, you can usually change your position or your short term view on a very short term basis, without having to tell the world. Salespeople have less flexibility, but can change their call from day to day as markets move back and forth.
But as an economist or analyst, your call is announced to anyone in the world that cares to listen to it, and if you’re senior enough you might well find yourself discussing it on CNBC or Bloomberg. You can’t credibly move your forecast one way, then back the other, without losing credibility, regardless of what your model tells you. Success moves in forecasts look better if they’re in the same direction. As such, they are usually ‘behind the curve’ relative to market pricing.
This helps to explain why some central banks are having trouble getting anyone to believe their forward guidance. In many cases, the GDP forecasts look too conservative, for all the reasons above. This is then compounded by the fact that several, include the Bank of England, have attached ‘terms and conditions’ to their guidance, which have widely been interpreted as a cop out.
To conclude, the forecasts are behind the curve, and by more than normal because of the turning point.