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Business News/ Opinion / Columns/  Economic forecasting is getting harder and uncertain

Economic forecasting is getting harder and uncertain

We must stay alert and nimble as widely varying expectations point to how little can be said confidently

Inflation numbers for January in both India and the US this week again came in higher than the consensus of economists’ predictions. Photo: MintPremium
Inflation numbers for January in both India and the US this week again came in higher than the consensus of economists’ predictions. Photo: Mint

About a fortnight ago, the IMF’s chief economist gave a remarkably upbeat assessment of the global economy. Pierre-Olivier Gourinchas said the global economy had displayed a great deal of “resilience": “Labour markets are tight, household and business investment remain strong… barring new shocks, 2023 could be the year of turning points, with growth bottoming out and inflation decreasing." Just weeks earlier, however, the head of IMF, Kristalina Georgieva, had characterized a third of the global economy as heading for recession and warned that even in countries that would escape one, for hundreds of millions, “it would feel like a recession.This week, Georgieva was at it again, warning we must accept that we live in a “more shock-prone world.

Such a divergence of views within the same organization, let alone the broad spectrum of commentators, highlights that economic forecasting has never been quite so difficult—and exciting. The wide gap between Gourinchas’ projections and the IMF managing director’s world-view at the beginning of January can largely be attributed to Beijing’s abrupt U-turn on its covid policies. The risk as we look ahead at projections—of, say, much higher global oil demand because China has opened up—is that analysts may prove too bullish about China reverting to its trend growth after the inevitable dramatic rebound in the short-term of its $18 trillion economy. Yet, at the annual chatfest at the World Economic Forum in Davos, US CEOs reportedly came out bullish after a meeting with Chinese economic czar Liu He, who suggested that Beijing’s crackdown on tech companies and its controls on the property sector were over. As FT’s Tom Mitchell, a veteran China correspondent, wrote, it would have been more persuasive if Alibaba’s Jack Ma had been invited to Davos. (The billionaire is said to be in hiding in either Tokyo or Bangkok after falling afoul of Beijing.)

Inscrutable China aside, the world is a much more challenging place for economic forecasters. Just a couple of years ago, there were extreme shortages of workers and shipping containers, most notably at the port in Los Angeles, but globally too. Last week, shipping giant Maersk reported record earnings for 2022, but warned of a four-fold drop in profits in 2023 because shipping demand is declining just as a huge increase in container capacity arrives. The decline is because inventories are being reduced in the developed world, in part by asking developing-world garment exporters, for instance, not to ship products ordered months earlier. (The slowdown in labour-intensive exports from India of recent months was correctly forecast in August in this column by a large buyer for US retailers based in New Delhi.)

Inflation numbers for January in both India and the US this week again came in higher than the consensus of economists’ predictions. Who could have guessed that markedly higher prices for cereals, eggs and milk and high core inflation would push India’s CPI in January up as much as 6.52%? As JP Morgan’s Sajjid Chinoy observes, even though “the economy’s output has consistently remained 6-7% below its pre-pandemic path" and the employment/working age ratio has fallen post pandemic, suggesting the economy has plenty of slack, core inflation continues unchecked at about 6%. Chinoy suggests two possible explanations. One is that “both business and household inflation expectations remain much above pre-pandemic levels" as borne out by a recently published RBI survey. Chinoy’s second hypothesis is fascinating. As the pandemic caused considerable distress, smaller firms in India, which did not receive the generous support they enjoyed in developed world economies, simply went out of business. “To the extent that competitive intensity has reduced in some sectors, the pricing power of large firms can be expected to have increased. All else equal, this should result in higher inflation," writes Chinoy.

The US, meanwhile, is the locus classicus of conflicting data. In the past two weeks, markets have been buoyed by the fact that wages in the US private sector were shown to have grown by just 1% in the last quarter of 2022, the equivalent of an annualized rate of 4.2%. Fed chairman Jerome Powell described the data as “constructive", even though he said both inflation and wages were rising faster than the Fed was comfortable with. Markets hear what they want to. This was seen as a good sign, but inflation remains far from the Fed’s target of 2%. While it’s clear that the US and indeed Europe—except Britain—are not going into a recession, Tuesday’s 6.4% CPI number in the US shows that the Fed may have to hike interest rates for longer than we thought just weeks ago.

And so it goes, with each economic data point alternately confusing and clarifying. To add to the cacophony, let me close with a prediction or two of my own. India will not replace China as a principal factory for the world, not least because our customs regime is too inefficient and our tariffs are well above those in East Asia. Crowding in private investment, as India’s budget-makers boldly envisaged, will not happen (again) if GDP growth this year is closer to 5%, our savings rate remains relatively low and capacity utilization rate averages about 75%, while one of the government’s designated national champions remains in the spotlight and under pressure to deleverage. In Chinese astrology, this is the Year of the Rabbit. Those born in this year are typically alert and nimble—but also known to be prone to escape reality. As forecasting gets harder, we will need to adopt the more noble of those traits.

Rahul Jacob is a Mint columnist and a former Financial Times foreign correspondent.

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Published: 15 Feb 2023, 10:28 PM IST
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