Why most economic forecasts are wrong

me4 Forecasts of business performance emanate from academic ideology, poor models, self-interested bankers and lazy journalists. Their mix of naive pessimism and cynical optimism is both confusing and deadly.


Analysts polled by Reuters expected a 10.9% rise in today’s Chinese exports stats for July from a year ago in dollar terms. They were wrong. The IMF did not comment on how this might affect its recent upgrade of Chinese economic growth, but then that was odd in the first place given China posted its weakest growth figures for 26 years last January.

But this didn’t dampen the FT’s spirits, as it bouncily announced that one set of weak-looking data from China would not upset “the trend towards stronger growth”. In other sections today it yet again lauds the strong euro, and then talks about a eurozone “that is unsafe at any speed”.

Moving on from the flawed predictions of China analysts and optimistic confusion at the world’s allegedly definitive business paper, senior global analysts surveyed by Bloomberg think the US economy will expand 1.3% in 2017. This is some distance from the 2.6% being bandied about by the IMF a year ago – and way behind the 3rd quarter 3.2% growth recorded last year, down somewhat from the 1.6% expected by US business economists last December, and miles behind the 2.1% the OECD was predicting in late 2015.

Since 2011, every IMF and ECB annual forecast for Greek unemployment has been wrong.

It would be easy to conclude from the above that each and every econo-fiscal and financial commentator on the planet is more goon than guru, and not so much a pundit as a patron…or is, quite simply,  clueless and craven rather than clear-headed. It would indeed be easy, because it is at least 95% true.

This is nothing new: from 1929 via 1973 to 1988 and on to 2008, over 90% of self-styled experts failed to see the bust coming. Since the 1990s, things have worsened thanks to the blind belief in models, because “very bright” people trust computers….failing as always to remember that such machines are programmed by human beings, and most of those with that skill-set predict the expected. In business matters, the possibility of the unexpected is only analysed with any rigour by a very few people.

But the equal and opposite flaw is just as misleading:  that is, the self-deluding (or monetarily rewarded) denialism of history, consequence and outcome. For the vast majority of “professionals” it is entirely in their interests to know what’s going to go wrong before everyone else, as this gives them the opportunity to get out before the panic. They disguise their hedges, hide their feelings, and schmooze lazy, self-important journalists with this is mind.

To describe and explain the synthesis of this accident in waiting requires the observer to remember that event always at the root of every unexpected disaster: a collision.

In the markets, the multiple pile-up collision is between hubris, fat-headedness, liars, youthful optimism, ignorance, greed, aged cynicism, robotics and herding. Given the few who always wind up being rich by slaughtering the herd, one might say the collective term should be a collusion of collisions.

Sovereign states, central bankers, banking firms, hacks, investment combines, big business and senior politicians collude in silencing the sagesse of cooler heads. Novices, robots, academics, sheep and giddy speculators produce the “unexpected” collision. Their vehicles may be fuelled by idiocy, amphetamines, coke, ideology or anti-depressants….but whatever keeps them going renders their actions decisive in the end.

This is what “markets” really are as the booms head towards bust. Before that stage, they are in the 21st century massively dominated by algorhythmic technology on the one hand and sovereign banker manipulation on the other. Their directionalism too is utterly decisive in both setting the agenda, and shutting out the ordinary citizen.

“The markets must decide” carried Reaganite Thatcherism aloft for eighteen years, and forced Clinton-Blair-Cameron policy to go with the flow for a further twenty years. It was largely nonsense at the outset, and it is completely self-serving nonsense now.

The predictions since Crash1 in 2008 have been consistently wrong for two reasons. First, they anticipated honesty on the part of the elites, and were thus too pessimistic. Or second, they believed the narrative put out by the elites, and were thus too optimistic.

I have been guilty of the first crime. This has taught me to be very wary of the second.

Why Big is Bad