Graeme Leach is CEO & Chief Economist of Macronomics, a macroeconomic, geopolitical and future megatrends research consultancy launched in 2016. Regularly invited to comment on radio and television news, he is considered an authority on a range of financial topics. Here he examines what causes economic forecasters to falter in their predictions, and yet dares to give us a few predictions of his own.
There aren’t many iron laws in economics, but this might be one of them: When it comes to the long-term economic outlook, the conventional wisdom is almost always wrong.
Way back in the 1960s, the conventional wisdom was that the USSR would be the largest economy in the world by the end of the 20th century. Well, that forecast went awry. The USSR didn’t even exist by the end of the 20th century.
Moving into the 1970s the received wisdom was that Germany would take up the reins and cross the finishing line in first place. Those forecasts were being headlined, just as the German post-war growth surge began to come unstuck. Then we reached the 1980s, and all hail the Japanese model, with predictions that it would usurp the US as the number 1 economy. That was just before the Japanese financial system crashed and was followed by 25 years of economic stagnation.
The early 1990s malaise needed a tonic of good news, and bang on time, it arrived. US productivity growth began to accelerate in the mid-1990s, in the wake of the emergence of the new economy. Spirits soared and the US budget deficit moved into surplus. Then the proverbial hit the fan, and the dot.com boom turned to bust.
Where next? For those scouring the world for good news, all was not lost. The 2000s saw another big swing in sentiment, this time to the East. China was going to dominate the 21st century and there would be 10% GDP growth for as far as the eye could see. What’s more, the global financial crisis was seen as further evidence the future belonged to China, not America.
But, not so fast. The ink was barely dry on these headlines before new ones began to appear: China – How slow will it go? China – Will it fall into the middle-income trap? People are only now beginning to understand that China is far from a one-way bet.
The first big question is why is the conventional wisdom so bad? The answer is that it’s very easy to take the easy road and extrapolate the near future from the recent past. If an economy has grown 5% per annum in recent years, this becomes the number going forward for the next 2-3 years, and before you know it, for 5-10 years (e.g. in the case of China, 10% per annum growth became part of the furniture and embedded in financial markets, and business plans. A lot of reports and a lot of careers were dependent on it).
Economists know an awful lot about what drives long-term growth, but they’re not very good at forecasting it. Quantifying long-term growth is very difficult when factors such as culture need to be incorporated. Model projections aren’t the end of the process; they’re merely the beginning. Forecasting is much more of an art than a science, and the story is far more important than the numbers. That sort of approach challenges the conventional wisdom root and branch. Winston Churchill wrote that the further back you look, the further into the future you can see. Most economists don’t study economic history, let alone history full stop.
Future insight demands a knowledge of history, geopolitics, demography and future megatrends … and yes, macroeconomics. But macroeconomics takes a very important place alongside other disciplines. It’s not the sole discipline at work. It’s first among equals at best.
The second big question is what happens if you take a more eclectic approach and challenge conventional wisdom, where might it be wrong right now? What would you put money on?
Here are my challenges to conventional wisdom:
- UK GDP growth will be faster, not slower when the UK leaves the EU
- We’re not at the end of the euro crisis, nor the beginning of the end, but we may be at the end of the beginning (with acknowledgment again to Churchill)
- Trumponomics will have a big impact on the UK economy
- The end of oil will come much faster than we think, because of technological innovation, not because we’ll run out. This will also transform the geopolitics of the Middle East
- Our children will believe in global warming but our grandchildren won’t
Those listening to my speeches will find out why!
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