Monday, 30 December 2013

Prognosis: Negative - or How close were my predictions for 2013?

Last year, a few days before the year ended I embarked in a bold quest of making predictions on economic and political outcomes in the year to come, facing the risk of making a fool of myself by completely misfiring. Luckily, I was actually rather close in most of the predictions made.

Before I start evaluating my performance, I would just like to make a quick digression on the precision of forecasting. Why do we make predictions? Because we're facing an uncertain future. Our decisions today depend on the expectations of what the future will bring and how our decisions will be affected by it. 

So how can we be sure that a forecast will actually turn out to be correct? We cannot. We can evaluate someone's past performance in predicting things like real economic variables or political outcomes and based on this alone determine how good he or she is in making a correct prediction. But in general we can never be certain. I read somewhere of an experiment done back in the 80-ies involving around 300 experts (economists, analysts, political scientists, notable journalists) and comparing their forecasting performance. What they've found out is that the average expert did only slightly better than a random guess. However, a new forecasting project, involving an even bigger pool of experts found better results where the top experts significantly outperformed the mean predictions. 

With this in mind I will evaluate my forecasting performance.  Overall, I did ok. Economic growth was slow in Europe as predicted (surprise, surprise), slightly better in the US, and declining in China and India. However I was a bit more pessimistic for some countries and too optimistic for others (I'll go through each individually). 

I couldn't possibly foresee the vast anti-government protests that hit most of the developing world during the summer. I covered the protests in a blog post, supporting their plea for a better democracy and more political and economic inclusiveness. 
Yes, it's a Seinfeld reference
Germany - spot on; slow growth coupled with Merkel's persuasive electoral victory, with possibly a new coalition. I didn't state that it would necessarily be another grand coalition with SPD, but after some twelve weeks of negotiations they finally did reach an agreement. Merkel's third primeministership was never doubted for a second. 

France - I was waaay too careful on this one. France is descending faster than anticipated, with unemployment rising (close to 11%) and growth being so slow that the country is persistently on the verge of a double-dip recession (if it already isn't in one - by today's standards, who can honestly tell?). This is all due to Hollande's ridiculously high taxes, no significant reforms, and a series of policy mistakes and U-turns. His approval ratings keep hitting new lows - currently down to only 15%!  

Italy - Even though I correctly anticipated Bersani winning the elections, he himself did not become the Prime Minister after failing to strike a deal with the unanticipated wild card, Italian comedian Beppe Grillo and his anti-establishment Five Star Movement. Instead, because of a strange political gridlock (rather common for Italy actually), Italy's President Napolitano in April gave the mandate for forming the government to Enrico Letta, creating Italy's first grand coalition, where he received support from his own center-left party, Berlusconi's center-right party and Monti's centrist party. The political battles didn't stop there as in September Berlusconi pulled his party members out of government. In the mean time Berlusconi was evicted from Parliament on tax evasion charges. I was much more pessimistic in my predictions for Italy immediately after the electoral results (I revised my forecasts), however they've somehow managed to restore stability with the Letta government.

I was right that the new government will continue with Monti's reforms, with Letta being impressive on that front. On that behalf I expected Italy to achieve some positive economic growth by the end of this year. This unfortunately didn't happen. The economy stopped contracting, but it is still in dire straits. At least the borrowing costs have decreased and the debt picture looks slightly better.

UK - I was right about the UK pulling itself out of a (triple-dip?) recession, as Q3 growth is now standing at 0.8%. My prediction was a yearly growth rate of 0.5%. It may well end up above this target. However, a lot still needs to be done in Britain, despite the welcoming signs of somewhat positive growth. The nomination of Mark Carney to the BoE also proved to be encouraging for Britain.

The rest of Europe did poorly as usual, unfortunately. Spain, Portugal and Greece were all still contracting, joined by Cyprus, Slovenia, Czech Republic, Finland and even the Netherlands. The Eurozone in total is still in a double-dip, as predicted.

I was also correct in estimating that the biggest growth in Europe will belong to one of the Baltics (it was Latvia with 4.5%), while the largest negative growth will be either Greece or Portugal (it's still inconclusive, but these two are leading the pot).  Also, Croatia entered the EU in July. 

Source: Trading Economics.

USA - I was carefully optimistic regarding the fiscal cliff being resolved in January, but couldn't foresee the government shutdown in October. I was wrong in the predicted 2% growth rate, when it was actually stronger than that (around 3%). Still a lot of problems await to be resolved in the US, so I'm sticking to the same warnings for next year (this will be covered in my next post).

Japan - Abe's policies are proving to be much more effective than I've predicted. Growth for this year is close to 2%, whilst I predicted another slow year of 1% growth with rising pubic debt. I intend to cover Abenomics in a separate post pointing out to Japan's unresolved structural problems, but in the short run, Abe has surprised me, I must admit. 

BRICs - I was correct on China's and India's slowdowns, only slightly missing their forecasts (8.5% vs. the actual 7.8% for China, and 6% vs the actual 3% for India) and was also slightly over for Russia (4% vs the actual 3.4%). Where I failed completely was Brazil, predicting strong 4 to 5% growth, while the economy is stagnating at 0.9%. You can't win 'em all!

In the Arab world, I actually did expect more political turmoil in Egypt (not the coup however, but instabilities yes). In Syria I expected the Libya scenario where Assad would be ousted by the end of the year. Needless to say, I underestimated him as well as the political protection he currently holds. 

Overall, with some good hits and some hard misses, I believe I did quite well, so I'll do the same thing for next year.

In the mean time have a Happy New 2014!

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