Monday, 28 December 2015

Hits and misses: Evaluating last year's predictions

This is becoming a sort of a post-Christmas tradition on the blog - each year in the weak after Christmas I offer a wrap up of the year by evaluating my last year's predictions. Once again, I have to say, it was a good year in terms of what I got right (I managed to even beat my own predictions from 2014: 85% compared to last year's 75%), but there were a few events that went under my radar (the Greece situation triggered by Syriza's victory, and the refugee crisis). 

The title of last year's predictions was: "2015: Back to Realpolitik and back to growth". My main prediction was that most economies in the West would return to having steady rates of economic growth (which came true), and that debates over the economy will be overshadowed by the return of realpolitik and muscle-flexing between Russia and the West. I've also stated that "low oil prices will be the key in prompting a stronger recovery", which they were, and I managed to exclude Russia from that prediction in that low oil prices, coupled with sanctions, would hurt their economy even further. Russia will end 2015 with negative growth (the first three quarters were negative), but it was Russia in particular where the debate over the declining economy due to low oil prices and a stumbling ruble was overtaken by its military conquests in foreign lands (Ukraine and Syria). 

All in all, I offered quite a positive economic outlook, but a grim political one. I could say that this came true, however the political outlook was grim for reasons I failed to predict. 

Let's give it a run around topic by topic:

The Hits:

1. "will the central bankers raise interest rates next year? This is now becoming increasingly likely. The FED will be first to do so amid a stronger recovery in the US." 

Yes! Prediction achieved in the very last minute! Two weeks ago the Fed raised interest rates from 0.25 to 0.5% for the first time since 2008. Furthermore they've announced the rates to continue rising throughout 2016 as well. Since investors saw this coming, the announcement hasn't unsettled markets so much (as I anticipated), but it did add strength to the dollar and it did cause problems for the emerging markets (and will continue to do so). 

1.1. I was also right in saying that the ECB and the BoJ will not increase rates this year.

2. "Europe (Eurozone) will continue to grow at around 1% as it did this year, however this won't mean that a robust recovery has started. Unemployment will stay high (particularly in France and Italy), despite some members improving their unemployment situation (Spain, Greece, Ireland, Portugal). Inflation will stay low (the threat of deflation is becoming Europe's serious long run issue), budget deficits will be lower than this year, and we might even see some structural reforms implemented (however their distribution will certainly be skewed and limited to a few countries). So in Europe the year is expected to be a year of positive trends, but they still won't be felt by the majority of its citizens."

A spot on prediction, growth rates were indeed around 1% (current prediction is 1.5% but this may go down in Q4), where despite a good two opening quarters, the third was a bit of a disappointment of only 0.3% growth. Unemployment unfortunately stayed high (again, particularly in France and Italy, but it started to decrease in Spain, Ireland, Portugal and even Greece, so the average is slightly lower than last year 11.6% to 11%), inflation low (around 0%), while budget deficits on average did decrease (from 3% to 2.5%, EU average), but not as a consequence of structural reforms. Finally, the last prediction is also unfortunately true - currently it's still a jobless growth in Europe. 

2.1. "The "it" country in Europe in terms of growth this year will be Ireland (3.5%)." 

Ireland was definitively the "it" country, but its growth for 2015 will probably be even bigger than what I've predicted. The current forecast is around an impressive 6%! This will surely continue into 2016 as well. Kudos to Ireland for engaging a truly robust recovery, with unemployment, debt to GDP, and the budget deficit all going down, and exports going up. And all that with inflation around 0% (i.e. without a monetary stimulus; or in other words - borderline deflation did not hurt their recovery). 

3. Regarding the political situation in the US, I stated Hilary will be the Democrat's strongest nominee (kind of a no-brainer), but that it was too close to call for the Republicans. Good prediction as well, since Trump (and Carson?) came out of nowhere! 

4. "In Japan, the growth rate will be positive, although less than 1%. It still suffers from many of the same problems as it did in the past 20 years, and Abenomics has clearly failed as the remedy it was hoping to be. The rise in consumption tax has hurt them much more than expected. ... It seems that nothing works to prompt Japanese growth. Any short-term macro policies aimed at boosting growth are counterbalanced by a problematic fiscal situation. Japan remains in its limbo state for another year." 

Unfortunately, this too came true. Japan was stuck with around 0.5% GDP growth, and with Abe's economic policy still unable to kick-start the economy.

4. "For Germany next year won't be a year with strong economic growth. It will be around the European average of 1%. Introducing the minimum wage should have a neutral net effect on growth... The biggest drag on growth will be a balanced budget. But the Germans are well aware what they are sacrificing for this. ... And finally, low oil prices will certainly help Germany in the following year."

Growth was around the European average, estimated at 1.7%. Overall, Germany's fiscal prudence did cause a drag on growth, but this was all expected and planned. 

5. UK: "The main prediction is that the Conservatives will stay in power, and that UKIP will become a parliamentary party...I don't think there will be a National government of Conservatives and Labour, as some tend to predict." 

Got that one right, and I made the prediction in the beginning of the year when none of the pundits got it right and when many were in fact talking about a grand coalition between Labor and Conservatives. I sought my bragging rights back in June.


5.1. "As for the economy, it will continue on a stable growth trajectory with around 2.5% GDP growth, and more importantly with unemployment declining and the budget deficit decreasing. Housing prices will continue to rise in Britain, although perhaps not as much in London, at least in the super-prime property market."

GDP growth was predicted to be exactly 2.5% for this year, both unemployment (from 6.1% to 5.4%) and the deficit (5.7% to 4.4%) went down, while housing prices continued to go up (this market is turning into quite a bubble). 

6. Ukraine: "in 2015 it is likely to remain in its current status quo. Putin, facing domestic pressure of a declining economy for the first time in his 14-year reign, won't risk new conflicts over Ukraine, but is very likely to increase nationalist and protectionist rhetoric back home, primarily to protect his strong position. It is this rhetoric that will dominate the scene next year." 

Quite accurate. Ukraine remained in its status quo, Crimea is still annexed, there are no new conflicts, while Putin did very well to protect his position back home. 

7. Russia: "Russia is facing a serious economic crisis, in many ways self-imposed - dependency on oil and gas, cronyism, and foreign policy interventions have finally caught up with Putin. History is repeating itself for Russia, only this time their position of power was short-lived. However Putin won't go down that easily. That's why I expect a resurgence of Realpolitik in foreign relations." 

Linked with the previous issue, and with the overall prediction regarding how low oil prices will adversely affect Russia, it did face a serious economic crisis, but Putin came up with an anticipated response: building up his military power and showcasing it abroad. 

8. "In China growth will fall below 7%, slightly below expectations ...  based on reports on weak property sales, a decline in fixed investments and the manufacturing sector, and expected low inflation and lower consumer spending."

This has finally happened as well, China is experiencing a slowdown in growth. Despite the worries from the Chinese government, this is still a more than decent performance from China, and was actually expected (one cannot grow indefinitely at double-digit levels).   

9. "IIndia after a gloomy year expect the growth rate to accelerate under new leadership of Narendra Modi. There are many reasons for optimism in India; low oil prices will ease the pressure on high inflation and the current account deficit (India imports 70% of its oil consumption). This will enable India's central bank to cut interest rates in order to help the government promote some structural changes to India's economy ... All this will help its economy grow above 6% next year." 

All this has happened, low oil prices have eased the pressure and helped fuel higher growth, to which the central bank responded by cutting interest rates. Economic growth will probably be around 7% this year, outpacing China for the first time in decades.

10. "As for the rest of the emerging markets? A strong dollar certainly doesn't help, neither does the announced increase in interest rates from the Fed. Low commodity prices and low oil prices will hit the commodity and oil exporters (particularly in Africa and South America). Bond yields are on the rise in most of the emerging markets, so I do expect another growth slowdown next year for the EMs." 

So true, the emerging markets have fallen behind the developed world in economic performance. Considering that they've failed to achieve convergence in living standards this is even more worrying for them. A strong dollar coupled with low commodity prices depressed them further, and even caused havoc in some countries (like Venezuela and Argentina). 

11. Oil prices: "next year the price of Brent oil will probably drop below $50 per barrel at one point and will remain low throughout the first half of the year."

Indeed it did. The price continued to be low throughout the year (currently at $37). However the biggest impact wasn't so much on Russia as it was on the emerging markets, particularly Venezuela (the decline in oil prices struck a huge blow to their socialist model which was severely punished at the polls).

The Misses: 

1. "In the United States I predict around 3% growth for next year, driven by a resurgent Silicon Valley boom, and by low oil prices. ... low oil prices will certainly provide a net benefit for the US economy. It might, however, hurt a lot of newly formed shale gas producers and hence contract their exports (along with a stronger dollar)."  

The growth rate was strong, but it will most likely fall a bit short of the 3% target. Current estimates have it around 2.5% (close to last year's 2.4%). The decline in oil prices has however failed to pick up consumption as anticipated, while some oil companies have slashed investments as a consequence. I did state that it was difficult to predict how precisely the low oil prices will affect the US economy, since it is, at the same time, the largest producer, consumer and importer of oil, but I did state that it will entail a net benefit for the economy. This is still left to be seen, but to be fair, I will place this entire prediction under the miss category, as the factors which I thought would be key in prompting US economic growth failed to do so. 

2. "The country with the worst performance will be either Cyprus or Croatia (both probably around 0%, perhaps even negative growth)."

Argh! I never seem to get this one right! Someone always surprises me. I was way too bearish on Croatia and Cyprus, while Greece went completely below my radar. I simply did't see Syriza coming. More on that below.

3. "I predict that the Conservatives will enjoy a minority government, with UKIP (and what's left of the LibDems) giving them support to form the government..."

Even though I got the general prediction on the UK elections correct, I was wrong about the scope of victory for the Conservatives and I slightly overestimated UKIP's influence. It turned out that the Conservatives didn't need any coalition partner and that they've done it all on their own. To be fair I also failed to predict that the SNP will take so many seats away from Labour. 

4. "I wouldn't be too surprised to see the US putting troops back on the ground and leading the fight against ISIS. In his final two years in office Obama has nothing to lose with such a decision. But again, this will only happen if the conflict escalates beyond control and ISIS starts gaining more power." 

Ok, this one was a so-so prediction. I hedged by saying that "if things escalate beyond control" (vague as this may sound) the US would put troops on the ground. From today's point of view it looks like another superpower will beat them to it - Russia is increasing its military presence in the Middle East, and I would be surprised to see them lead the charge in 2016. But more on that in the next post. 

Under the radar:

1. Syriza and Greece. The story that occupied the first half of the year. And just by the end of 2014 I was thinking Greece is finally going to be OK. Not very high economic growth, but definitely a positive outlook, and then the elections happens, Syriza wins (single-handedly), and it all falls down the drain. To do a quick recap see here, here or here. I was actually correct on Greece many times before. It still serves to be one of my most precise predictions, when back in October 2011, I predicted exactly the scenario that would occur a few years from then, following a terrible response strategy from EU's policymakers. On Greece I have had a stellar forecasting record, which is why I was particularly unsettled as it went under my radar by the end of last year. I won't make that mistake again in 2016. 

2. The refugee crisis. And Europe closing its borders. 
No one saw it coming. At least not in the scope that it occurred, where in 2015 alone almost a million migrants have entered the EU by sea. In 2014 it was nowhere near this much. 

3. Corbyn and Trump? Fair enough, but literally NO ONE saw these two emerging. Not even themselves by the end of last year. Surely. For 2014 I was right in predicting that anti-establishment extremist parties will dominate the May EU elections, but I never thought that the extremists will start dominating within party lines. It still doesn't have to end well for either of them, but the trend is certainly interesting, and will be closely monitored. 

All in all, it was a messy year. With hopes that 2016 will be better (predictions coming up in the next post), I wish all my readers a happy new year!



2 comments:

  1. I must say I would have made same mistakes with Croatia/Cyprus and Greece.

    For Croatia, I would have expected that domestic inability to enact any meaningful reforms would still continue to be a drag on the economy. IMO Croatia is benefiting from the recovery in Europe ( I think strong export/tourism data supports this). Also, the economy has underperformed so long, and the shortfall is so deep that these growth rates are meaningless.

    Greece - yes, that with Syriza was a huge surprise. Take a look at their PMI. The moment these guys took over the PMI tanked. It just showed that apparently their electorate still lives in some fairytale land trying to have their cake and eat it too. In the mean time they destroyed what was left of their banking system.

    Japan - Abenomics is dead. No structural reform, some minor moves on reforming corporate governance culture and inclusion of women. Nothing as promised. Monetary policy cannot move LRAS curve. With falling working force, I think Japan growth rates in real terms will continue to be close to zero. Maybe a GDP per capita or GDP per worker would be a better measure, just not to claim the country is in recession with lowest unemployment rate ever.

    Even though I don't follow that much what is going on in the UK, I would not have expected that strong Conservative victory.

    In any case, this was fun read and a mini review of the year.
    I wish you all the best in 2016.

    P.

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    1. Thank you very much Petar! All the best to you as well!

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