Ethan Harris, global economist at BofA Securities, has planted a flag, arguing that consensus estimates on economic growth are simply wrong. The problem for investors is that he’s among the most bearish forecasters on Wall Street.
In two separate research reports this week, Mr. Harris noted the stark difference between the bearishness of fund managers and the optimism of most economists. The newest edition of BofA’s popular monthly fund manager survey found record low expectations for global economic and profit growth, yet economists are, by and large, bullish on the global economy.
Mr. Harris notes that the median economist estimate for the next six quarters of U.S. GDP expansion averages 1.4 per cent, which is only 0.3 per cent lower than the long-term trend. By contrast, BofA expects the 2023 U.S. economy to contract by 0.2 per cent.
The growth estimates by the Bank of America brokerage are lower than its peers across the world. For next year, Mr. Harris’s team expects Euro-area growth that is 0.4 percentage points lower than consensus, a full percentage point lower for the U.K., and 2.2 percentage points lower (minus 0.4 versus 1.8) for Japan. For Canada, BofA’s estimate of 1.8 per cent GDP growth in 2023 is only marginally below the 1.9 per cent consensus.
Inflation is the reason Mr. Harris’s forecasts differ so much from his peer group. More specifically, he believes central banks will have a harder time beating inflation than what current estimates for growth and consumer prices indicate. “Not only are the growth outlooks optimistic, in virtually every economy the central bank wins the inflation battle without a recession,” he wrote. “Apparently, fighting inflation is a fairly painless exercise,” he wrote sarcastically.
BofA Securities believes too many economists are extrapolating from current trends of slightly slower growth and underestimating the negative effects of much higher interest rates. Mr. Harris reminded readers that monetary policy acts with long and unpredictable lags, which means we are only beginning to see the negative effects of rate hikes on growth.
He also believes that, faced with higher than usual uncertainty, economists are hugging their growth forecasts close to central bank estimates. The consensus is “suspiciously similar” to central bank outlooks, he notes.
If forecasts by BofA are correct, the big problem for Canadian investors will be the contracting U.S. economy in 2023, which will limit demand for our exports.
-- Scott Barlow, Globe and Mail market strategist
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