John Kenneth Galbraith once said, “The only function of economic forecasting is to make astrology look respectable.” It’s a harsh critique, but he was right. Making economic predictions is notoriously difficult. And the late Prof. Galbraith would not have been surprised to discover astrologers looking even better compared with economists today.
The level of uncertainty in the global economy has experienced an upward shift in the past several months; economic uncertainty is now so pervasive, it feels normal. That may explain why that even as the economy is improving, the mood isn’t the same as it was a decade ago.
Economists have never convincingly outperformed astrologers when it comes to predicting the future because the future is unknowable. However, the confluence of three major shifts in 2013 has cranked up the volume on the “unknowable” dial.
The first shift is the slowing of the BRIC countries (Brazil, Russia, India, China) and the flow of capital from emerging markets. For a decade, they were the assumed engines of the global economy. But for a variety of reasons, growth in the BRICs has slowed and they can no longer be expected to do all the heavy lifting.
As well, investors are moving money out of emerging markets because of improving prospects in the United States and elsewhere. Whenever capital starts rushing from one region to another, it tends to be destabilizing. It’s like trying to carry a cookie sheet full of water – when the water starts moving in one direction it’s difficult to handle.
The second shift is the instability and tension in the Middle East. The news from this region tends to be of two sorts: bad, and very bad. Given the situation in Syria, it’s decidedly very bad. The political instability is adding tremendously to economic uncertainty.
The third shift is the anticipation about central bank policy. Before the global financial crisis five years ago, few people would have been able to correctly name their country’s top central banker. Today, they’re the celebrities of the business world – and as any celebrity knows, fans can turn against you viciously if you do the wrong thing. Central bankers are in a new and uncomfortable position: They’re expected to use their powerful monetary tools to save the economy.
Quantitative easing in the United States appears to be doing the trick, but the final chapters on Helicopter Ben Bernanke and his enormous asset purchases remain unwritten. Huge question marks hang over how quickly the Federal Reserve and other central banks will tighten monetary policy.
The flow of capital from emerging markets, the renewed Mideast instability and the fog around central banks’ next steps have raised the level of uncertainty. In such an environment, with so many unknowns, the question arises: Why bother with an economic forecast at all?
But that fatalistic viewpoint misses the point of preparing a forecast. Its purpose is not to predict what the future holds with accuracy (as nice as that would be), but rather to provide a best guess as to what might happen, around which we construct a range of possibilities.
Still, chatting about a range of possible events seems less satisfying than believing what experts say is certain to happen. This lust for knowing the future is in our DNA. A tarot card reader wouldn’t tell a paying customer, “You might find love this year ... or you might not.” But economists get away with it all the time. China might see a real estate bubble, or it might not. Greece might default, or it might not. The Fed might taper in 2013, or it might not.
Economic forecasting is not prophesy. It is the midpoint of a range of outcomes from which we start sketching out possible risks and scenarios.
The current high level of uncertainty is widening the range of outcomes, which makes it less likely that the pinpoint forecast will actually happen. We might not get the forecast precisely correct, but that’s okay. Astrologers don’t either.
Todd Hirsch is the Calgary-based chief economist of ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.