Sunday, January 08, 2012
Nice surprises so far - can they possibly last?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt. The table to accompany this piece is available on The Sunday Times website or in the newspaper.

This is not a time when you want to be dragged down further by deepening economic gloom.

Fortunately, despite the best efforts of some new year pundits, it is not happening. Pretty well every bit of economic data we have had so far has surprised on the upside.

As regular readers will know, the earliest readings on the economy are provided by surveys, and in particular purchasing managers’ surveys produced by Markit, a data provider. Official figures come a little later.

Before the publication last week of the December UK surveys, analysts were downbeat. Each one, however, was a pleasant surprise. The manufacturing purchasing managers’ index rose from 47.7 to 49.6, construction from 52.3 to 53.2 and the service sector from 52.1 to 54.

Levels above 50 indicate expansion and the weighted average of all three, up from 51.2 to 53.2, was the strongest since July. Were this just a phenomenon restricted to Britain, one might be suspicious. There are, however, plenty of signs of life elsewhere.

Gavyn Davies, formerly of Goldman Sachs and the BBC, now Fulcrum Asset Management, points out that leading indicators for the global economy bottomed out in July last year and are now showing a decent recovery.

China, which is more locked into the global economy than most countries, may be coming through its softer patch, to judge from the latest readings from its manufacturing sector. South Korean exports showed a significant jump. The global purchasing managers’ index, produced for J.P. Morgan rose to an expansionary 50.8 in December, its strongest since June.

In some cases the stronger numbers are a continuation of what ws happening last year. Back in August, without drifting too far into Irwin Stelzer’s territory, Standard & Poor’s downgrade of America’s sovereign debt rating coincided with deep gloom about the economy. A double-dip, it seemed, was certain.

Instead, America has had an “I’ll have what she’s having” tranformation. With few exceptions, the data has come in stronger than expected. Talk of a dive back into recession has faded.

Even in Europe, German unemployment has continued to fall and Spain’s jobless rate did not increase as much as feared. Survey data from the eurozone still points to mild recession but “mild”, rather than falling off a cliff, is the operative word.

Eight days into the new year is, of course, far too early to be cracking open the champagne, even if there were any left. This may be the economic equivalent of a dead cat bounce. Chris Williamson, Markit’s its chief economist, thinks the UK purchasing managers’ surveys are merely consistent with a flat figure for Britain’s gross domestic product in the fourth quarter.

Though that sounds a little too downbeat, it will take a decent bounce in official data for services and manufacturing to produce any GDP growth in the fourth quarter, fugures for which will be out on January 25. Perhaps for a while we will have to get used to the idea of flat being the new growth.

It can, however, be instructive looking back. As promised I am today publishing my annual league table of economic forecasts for 2011. What turned out to be a fascinating, event-filled year was also a pretty awful one for forecasters.

Let me concentrate on the big picture. Though we will not know for sure for another couple of weeks (and not for certain for many years), current evidence suggests the economy grew by 0.9% in 2011.

Every month, the Treasury publishes a compilation of around 40 independent economic forecasts. In January last year none of these - not one - had a growth forecast as low as 0.9%. The Centre for Economics and Business Research (CEBR) came closest, with 1.1%, and there were a few others starting with a “1” but the consensus was for 2% growth - twice what was achieved - and one optimistic group (Liverpool Macro Research) predicted more than 3%.

While forecasters were much too high on growth, they were far too low on inflation. I estimate that consumer price inflation will have averaged 4.7% in the final quarter of last year. A year ago the consensus was that it would be 3%. The closest was Michael Saunders with 4.1%. Many, however, had forecasts that suggested inflation would come in at barely more than half the outturn.

I have a lot of sympathy with the forecasters. Those who predicted weak growth thought, like the Bank of England, it would bear down more heavily on inflation. Those who thought inflation would be higher believed it would, at least in part, be a product of strong growth. The combination of weak growth and high inflation - and the lack of a response from the Bank of England in higher interest rates - was hard to forecast.

So nobody had a vintage year, which in the past has involved nine or 10 out of 10 in by scoring system. Congratulations, however, to Daiwa Capital Markets and Capital Economics for creditable sixes, with Daiwa just edging it.

Running close behind on five were the Economist Intelligence Unit and the CEBR and following them on four, BNP Paribas and Standard Chartered. I know in at least two cases - Daiwa and BNP Paribas - economists who were instrumental in producing the forecasts have moved on.

Most other forecasters, I suspect, will regard 2011 as a year best forgotten. My own score, a generous four or a more realistic three, was nothing to write home about.

Those who ignore the lessons of history are condemned to repeat them. The headline on the equivalent piece to this a year ago was “Forecasters failed to spot inflation surge”. Then they did it all over again.

What about now? Economists are subdued on 2012 growth prospects (consensus just 0.6%) but do expect inflation to come down to 2.1% by year-end. If they are wrong for a third year on inflation that would be unforgivable.

If they are right, they may be underestimating the positive impact on growth of lower inflation from the return of growth in real incomes and hence stronger consumer spending. This is something I have been talking about for a while. It offers the best hope for a year in which, in 12 months time, we may be able to say the forecasters, instead of being too optimistic, overdid the gloom.