Forecast data show reason for caution on recovery
2 Jun 2009, 2110 hrs IST, REUTERS
An analysis of the divergence between actual data and the Reuters consensus
forecasts shows that on the whole, economists haven't been pessimistic enough
despite their reputation for gloom and that may be reason enough for caution.
They have generally been missing the size of the monthly increases in business
surveys and consumer confidence, but not realistic enough about how deep a pit
the financial crisis has dug into the world economy over the past several
months.
So while investors and world financial markets are cheering on signs of "green
shoots", with some now talking about a strong snapback to growth in the second
half of the year, many remain convinced the recovery is more likely to be
sluggish.
"You would normally associate green shoots with actual growth but we are not
really seeing growth, we are just seeing less contraction," said James
Knightley, an economist at ING, one of the most consistently accurate in
capturing the severity of the recession in the forecasts made last year.
"It is just a terminology and just a buzz phrase of what people are using but
whether it is truly accurate or not, I think there are some question marks over
that."
Indeed, an analysis of key indicators in major economies polled by Reuters,
including GDP, retail sales and industrial production, shows that economists
have generally underestimated economic weakness in the first quarter of 2009
and have still done so for some key reports from April-May.
In the euro area, where a collapse in global demand for manufactured goods has
hammered its largest economy, the latest available official industrial
production data plummeted by double expectations.
Optimists point to the PMIs for signs of recovery, though as Knightley says,
they are still showing contraction, not growth.
Euro zone GDP shrank by 2.5 per cent on the quarter, much more than the 2.0
percent consensus. Only two of 38 analysts Reuters polled managed to get it
right.
The first estimate of US growth caught everyone unawares. The Reuters consensus
was a contraction of 4.9 per cent but the actual came out at 6.1 per cent. Only
five of seventy-five saw a contraction of 6.0 or more.
That is even more remarkable given that as a group, economists were overly
optimistic late last year about how resilient the world economy would be to the
worst financial crisis in more than 80 years.
MIXED SIGNALS
Critics dismiss these as old data, arguing the survey figures, particularly
those for the United States which was the first of the developed economies to
fall hard into recession, are clearly pointing the way out of the muck.
"We're seeing definitely real signs of improvement, more than just survey
data," said Michael Feroli, economist at JP Morgan in New York.
"The pace of decline in industrial production has moderated, the improvement in
the labour market is a little more tenuous but I think it's there as well, so I
think it is real."
There is little doubt that the data have turned slightly for the better and
that the billions worth of fiscal and monetary stimulus are helping. World
markets have got a whiff of the upturn in sentiment, sending the Standard &
Poor's 500 Index up by a third since March 9.
Economists completely missed the biggest jump in US consumer confidence since
early 2003. The rise to 54.9 beat the highest forecast of 45.0 by nearly 10
index points.
Analysts also missed the upturn in some business surveys like the German Ifo
index, the Markit PMIs and the US ISM index, all forward-looking indicators
which in the past have been a solid guide to the direction the economy is
headed.
But official data continue to be less than encouraging. The latest report on US
retail sales for April came in well below expectations.
News that one out of every eight US households with a mortgage was late on
payments or already having their home foreclosed in the first quarter was a
reminder that many people are still feeling the pinch.
"We're faced with a recession that is meant to be the strongest on record but
we are equally faced with a policy response which arguably is the strongest on
record," said Stuart Bennett, economist at Calyon in London.
"It could be that is having a little bit more of a positive response effect
sooner than some expected but I will still argue that we are still in a very
weak economic backdrop."
