Investment manager and economic analyst Steven Rattner gives a presentation at the Semafor World Economic Summit on April 12, in Washington, DC.Drew Angerer/Getty Images
Feeling confused about the economy? You’re not the only one.
The World Economic Forum announced Tuesday that 45 per cent of the chief economists it surveyed in its most recent poll say a global recession is likely this year. This would be a disturbing number – except that another 45 per cent of chief economists say precisely the opposite.
Prominent Wall Street strategists are similarly torn. Bank of America’s Savita Subramanian sees plenty of reasons why U.S. stocks will beat consensus estimates. Michael Wilson at Morgan Stanley and Matt King of Citigroup perceive lots of reasons they won’t.
How about Canadian interest rates? Capital Economics predicts the Bank of Canada will start chopping its policy rate this year. Bank of America doesn’t expect cuts before next year.
Some forecasters even appear to be debating their own models. The Conference Board of Canada, for instance, announced in April that its “recession risk tracker” showed a 95-per-cent risk that the country will slip into a recession over the next year. However, it rushed to add that “just because the risk is high, it doesn’t mean that a recession will happen.”
If there is any conclusion to be drawn from all these clashing forecasts, it’s that this is one of the more baffling economic junctures in memory. The market has always played host to divergent opinions – that is pretty much the definition of a market – but today’s spectrum of viewpoints is exceptionally wide.
“The current economic outlook is more uncertain now than at any time I can recall in my 35 years as an economist,” wrote Erik Fossing Nielsen, senior economic adviser to UniCredit Group in London and a veteran of the World Bank, the International Monetary Fund and Goldman Sachs, earlier this year. “Or to put it in forecasting terms, the fan-charts for most variables must be unusually wide at this time.”
This is what happens when the most severe pandemic in a century collides with the biggest military conflict in Europe in more than 75 years and the most severe outburst of inflation in 40 years. Economic forecasts were never that reliable, even in more settled times. Now, after a few years of violent moves in interest rates and wild swings in stock and bond prices, they seem like works of fiction.
Among the mysteries in the current numbers is why big interest rate hikes over the past year have so far done little to bring the Canadian and U.S. economies to a grinding halt.
The usual economic gauges have not been much help. One of the most historically reliable predictors of an impending U.S. recession is an inverted yield curve – a condition in which short-term interest rates move higher than their longer-term counterparts. The yield curve deeply inverted last summer. Yet the recession many economists expected to hit early this year has still not shown up.
Is that because rate hikes are taking just a bit longer than normal to exert an effect? Or is it because there is something fundamentally different about this cycle that could entirely avert a recession? Maybe mass retirements among boomers is making labour scarce, while a genuine shortage of housing is keeping the real estate market hot. If so, rate hikes may no longer be as effective as they have been in the past at slowing the economy. No one really knows.
For investors, the prevailing uncertainty is frustrating. Oddly, though, it could turn out to be good news. Markets usually endure their worst setbacks when everyone acts on the same assumptions and pours into a single type of investment. The dotcom crash in the early 2000s and the U.S. housing crash a few years later showed what happens when the favourite investment doesn’t pan out.
There is little danger of that happening in today’s market. Opinions are too divided and diverse.
So have some patience with today’s divided economic opinions and faulty forecasts. To be sure, they don’t provide much of a guide to what to expect next. However, they help ensure that no one gets too confident. In an economy this murky, maybe that’s all we can hope for.
Ian McGugan