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More Growth, Policy Tightening and Inflation for Investors in 2018

More Growth, Policy Tightening and Inflation for Investors in 2018
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Friday, 22 December 2017 08:29 AM Current | Bio | Archive

This week I have tried to look at some of the longer-term questions instead of looking at the daily events. I’ll come back to the daily events at the start of 2018.

So, hereby, we have come to our final longer-term question for 2017 wherein we’ll try to give an answer to a very tricky question: “Should economists forecast?”

The question might seem absurd in some way to pose, but I believe that the answer is “No,” at least in the sense that financial markets “understand” forecasts.

For much of my lifetime as an economist, bank management, many that are brought up in the traditions equity research have asked me to formulate a measure that economists forecast accuracy to better assess the performance of the economics team.

It’s a fact that what works for equity analysts doesn’t work for economists for the very simple and at the same time very complex reason that economic data is neither stable nor reliable.

At the start of 2015, the U.S. economy was initially thought to have grown at 0.2 percent on an annualized basis. The number has been revised and revised. At one point, it was minus 0.7 percent. Now it’s thought to be 3.2 percent. Don’t worry, the number will be revised again.

The data suggested that the U.S. economy was on the brink of recession and then that it was growing significantly above its trend rate of growth.

Any economic forecast will be brilliantly right or spectacularly wrong, depending simply on “when” you measure it.

Pretending to be able to accurately forecast to a decimal place in this environment is absurd, and it becomes even more absurd as statistical agencies are increasingly under-resourced at a time of massive structural change in the global economy.

Economic models are not designed to give precise answers that are 100 percent relevant in the real world. Economic models come way down with assumptions. Those assumptions deliberately simplify the world to provide some kind of clarity to the outcomes, but the complexities of those assumptions are not suited to a world of hashtag (#) economics where profound economic consequences are limited to 280 characters. Twitter is not a medium for economists.

The problem is the media today want precise numbers. It sounds so much better as a soundbite and its sensationalizes the outcome.

Economists have proved that the financial media has become more sensationalist in recent years.

So, what can economists do?

Economics and economic modelling is very good at proving that something isn’t true, revealing “fake” news.

That can be done more easily than proving that something is true of course.

Does immigration cause unemployment? No, it does not and that can be proven.

Economics is also generally pretty good at relative assessments.

Has income inequality increased over time in China? Yes, it has.

Has the gender wage gap improved in the United States? It seems so on the surface, but where economists go deeper into the facts and data, it can be shown that there has in fact be no improvement.

Economists can generally assess where the one policy leads to a more beneficial result than another and where the trend growth will rise or fall.

Economists are also generally fairly good at predicting where central bank policy is likely to head. Central bank policy is after all set by economists, or it is when it’s done properly.

Please keep in mind that economists are not at all abstract theorists.

So, that’s it for this week’s forecasts and please don’t worry about the decimal points.

The world in 2018 will have broadly trend-like growth with some policy tightening and perhaps a little more inflation.

Yes, that is what investors need to know.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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HansParisis
The world in 2018 will have broadly trend-like growth with some policy tightening and perhaps a little more inflation.
investors, economic, growth, policy, inflation
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2017-29-22
Friday, 22 December 2017 08:29 AM
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