17/9/20: Exploding errors: COVID19 and VUCA world of economic growth forecasts

 

Just as I covered the latest changes in Eurozone growth indicators (https://trueeconomics.blogspot.com/2020/09/17920-eurocoin-leading-growth-indicator.html), it is worth noting the absolutely massive explosion in forecast errors triggered by the VUCA environment around COVID19 pandemic.

My past and current students know that I am a big fan of looking at risk analysis frameworks from the point of view of their incompleteness, as they exclude environments of deeper uncertainty, complexity and ambiguity in which we live in the real world. Well, here is a good illustration:

You can see an absolute explosion in the error term for growth forecasts vs actual outrun in the three quarters of 2020 so far. The errors are off-the-scale compared to what we witnessed in prior recessions/crises. 

This highlights the fact that during periods of elevated deeper uncertainty, any and all forecasting models run into the technical problem of risk (probabilities and impact assessments) not being representative of the true underlying environment with which we are forced to work.  

22/4/20: Eurozone Growth Forecasts

April data on analysts and institutional forecasts for Eurozone growth over 22 sources, including a range of investment banks and international institutions are summarized here:

So far, estimated 2020-2021 economic fallout from COVID19 pandemic is in the range of 3.48-3.87 percentage points compared to January forecasts. In other words, markets expectations are currently at 2021 full year real GDP being 3.48-3.97 percent below the market consensus forecast back in January. Markets are now pricing in cumulative 2020-2021 decline in GDP of 1.22-1.70 percentage points on 2019 levels. Put differently, by the end of 2021, investment banks and international institutions are, on average, expecting the Eurozone economy to be 1.22-1.7 percentage points worse than at the end of 2019.

Should 2019 growth rate prevail in 2022, by the end of 2022, based on the above forecasts, Eurozone economy will still be worse off than at the end of 2019.

These expectations are not consistent with a V-shaped recovery expectations by the majority of the European political leaders and media pundits.

Economics 28/05/2010: Euro area leading indicators

I have not updated my forecasts for the euro zone growth in some time now, and it is on the 'to do' list. However, as predicted, euro area leading indicator from Eurocoin came in today at a disappointing 0.55% down from 0.67% a month ago and marking a second consecutive monthly decline. The indicator hit 0.79% in March 2010, marking a 3-year high.
This time around, declines in the indicator were driven by the adverse movements in the stock markets valuations. However, decline is absolutely in line with PMIs, despite the industrial production indicator showing sustained growth. Also worryingly, consumer confidence remains below waterline and is trending down again:Exports are on a tear up, rising at a faster rate in May relative to April. This might be the good news for overall growth, but it is clear that domestic investment and demand sides are still recessionary. Of course, there's a popular theory out there - in Brussels, and even here at home in Dublin - that exports will lift us out of the recession. If you think so - look no further than Japan. Japan has managed to maintain booming export activity, amidst shrinking overall economy for two decades now.