Nobody knows anything

LUV the economic forecasts

Chris Johns

All you need is LUV

Economic forecasters - you’ve got to LUV them. Why LUV? Those are the most common letters used when thing about the future of the economy. These days we need to find room for K, apparently. That makes it hard to find an amusing acronym (suggestions welcome).

L is used when the guru thinks a rapid spurt of growth is followed by a subdued flatline. Some analysts think that is where we are right now. A U-shaped recovery, possibly the next big new idea in a few months time, is really just an extension of the L. The infamous V is what many of them forecast a while back, just before economies reopened. That V, it was hoped would involve rapid and sustained growth but one that also elicited all those fears about inflation. A K-shaped economy is one where some sectors take off but others continue to sink. Think on-line versus high-street retail.

Although The Other Hand is famous for pointing out the futility of economic forecasting, it’s possible, just, to feel a little sorry for forecasters. Somebody has to do it (apparently, but we sometimes wonder why).

The sudden great economic stop mandated by government lockdowns has been followed by a sudden release of the brakes, at least for those countries now opening up. Like a jumbo jet, stationary at the end of a runway, just before take-off, the engines have been revved up and the plane is about to be released. The problem is that is exactly where the metaphor collapses.

It’s as if the brakes on the various wheels are released at different times. The aircraft slews all over the place, manages take-off and then the pilot notices that one of the engines isn’t running as it should. Steering becomes difficult and it’s even uncertain if the plane is going to have to land again; where it ends up is, for a while at least, wholly uncertain, not least because fuel supply to all the engines is uneven.

Sorry, that is pushing the metaphor just a wee bit too hard. As economies veer all over the place, economists are having a hard time figuring out where we are, let alone where we may be going. That point about uneven jet-fuel supply is particularly apposite: the fuel for economic growth, labour , raw-materials and finished goods are all over the place, all over the world.

The upshot of all this is a whiff of stagflation.

And this from The Economist:

Oops - sorry, that’s from twenty years ago. There really isn’t any new in the economic lexicon. Forecasters have a very limited vocabulary

Here is the right one:

The idea is a simple one. First, demand is running well ahead of supply in many areas. Lots of demand for wood, not enough trees have been cut down, not enough lorries or ships to transport them. Consumers suddenly spending but not enough shop assistants, waiters or baristas. Second, Delta has made this imbalance worse. Vaccinated Western consumers demanding goods from the unvaccinated East. This over-simplifies a tad - but it is true that where there are low vaccination rates there is lots of sickness and self-isolation preventing factories, mines and ports from operating at anything like the needed capacity.

The stagflation fears of twenty years ago didn’t, in the end, amount to much. Will this time be any different? The only truth to remember here is that nobody knows. As The Economist says, it all depends. As The Economist didn’t say, it always does.

Inflation is mostly occurring in manufacturing. If the much bigger service sector (in most economies) takes up the slack, there won’t be much to worry about.

Markets have yet to worry much about all of this. There has been the odd day when a high headline inflation print in the US, the EU or the UK has caused a ripple of anxiety in the all-important bond market. But the nervousness has not persisted for very long.

A big worry is energy prices. Earlier today we saw this kind of headline, on top of similar reports in recent months:

Wholesale and retail energy prices are rising. Supply problems in places like Russia meeting rising northern hemisphere winter demand will, apparently, make the situation worse. Only last year we had negative oil prices. Now, some energy prices are up 1000% from their pandemic lows. This is not going to help inflation concerns and markets may not retain their stability in the face of this threat. There again, that expectation of a difficult winter is just another forecast.

Talking about Hollywood, William Goldman famously said ‘nobody knows anything’. He was talking about which movies will turn out to be blockbusters, which ones won’t. He could, of course, have been talking about economic forecasting.

It’s not that bad. Unconditional forecasts that say ‘the economy will grow by 4% next year’ are rarely worth the paper they are written on. Valuable forecasts (they do exist) are ones that say ‘provided Covid doesn’t become a major problem again and inflation remains relatively well-behaved, growth should be fine, even excellent.’ All lot of caveats, but these sorts of forecasts are honest - and they are the best we can do.