Economists pilloried for inaccurate forecasts
PARIS — Economists are taking flak after missing the mark on inflation, failing to anticipate disruptions in global supply chains and forecasting a recession that has not materialized.
The COVID-19 pandemic, Russia’s special military operation in Ukraine, and more recently the Middle East conflict have made it tougher for experts to see clearly into their economic crystal balls.
European Central Bank President Christine Lagarde joined the chorus of criticism at the World Economic Forum in Davos, Switzerland, last month.
“Many economists are actually a tribal clique,” she said, referring to a lack of openness to other scientific disciplines.
“They quote each other — men more than women, but that’s another story,” the former IMF chief and French finance minister said. “But they don’t go beyond that world because they feel comfortable in that world.”
Economists need to get out of their comfort zone of Excel spreadsheets and rigid models, some economists said about their own kind.
The world “has changed a little bit”, Peter Vanden Houte, chief eurozone economist at ING bank, said sarcastically.
Post-COVID-19 reopening of economies sent prices rising and they soared further after Russia launched its operation in Ukraine, belying assurances from Lagarde and US Federal Reserve chairman Jerome Powell that the increases would only be “transitory”.
Combating inflation
The central banks had to launch a series of interest rate hikes to combat inflation. While price rises have cooled in recent months, policymakers have kept the rates elevated as they wait to see whether they can be cut later this year.
Lagarde admitted that the forecasts used as a basis for ECB policy decisions were not always right and that factors linked to the crises were not taken into account in its models.
“The models we currently use are less reliable because there are many factors that are difficult to integrate,” Vanden Houte said.
Economists dropped the ball by looking through the prism of the past.
“It’s not economic models that failed. It’s the lack of imagination of economists,” Maxime Darmet, an economist at Allianz Trade, said.
“They rested on their laurels” after 30 years of globalization during which “everything went well”, Darmet said.
With central banks using rate hikes to stop economies from overheating, economists warned that growth in the developed world would fall sharply or even contract in 2023.
Instead, economic growth in the United States accelerated last year while the eurozone — except Germany — stayed in the green.
Vanden Houte said the weak quality of data and a falling rate of responses to surveys were partly to blame.
New phenomena also threw a curveball. Savings have helped fuel consumption, while companies have “much better managed” high rates than in the past, said Christophe Barraud, director-general at Market Securities Monaco SAM.