Bangalore: A strong recovery from the worst global recession since World War II is probably not just around the corner, Reuters poll data suggest, even though for stock markets the slump is already in the rear-view mirror.
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% on the quarter, much more than the 2% 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% but the actual came out at 6.1%. 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.
Critics dismiss these as old data, arguing the survey figures, particularly those for the US 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 9 March.
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.”