From the editor...
“Nobody knows anything.”
Always remember screenwriter
William Goldman’s famous dictum when confronted with economic and market forecasts, especially if they have been as consistent as a weathervane. Following the banking turmoil, the fashionable view of the global economy’s prospects seems to have shifted to a “hard-landing” recession.
This scenario has eclipsed “a fashionable opinion just weeks ago” that the world would shrug off higher interest rates entirely, says The Economist. In January analysts were expecting a mild recession.
There are always excuses, of course. Forecasting has become especially difficult of late; wild swings in growth and a sharp fall in the number of people responding to economic surveys during Covid have muddied the waters. GDP revisions in the single-currency area are four times larger than normal. On the subject of revisions, it has always intrigued me that the preliminary official estimates of GDP growth tend subsequently to be nudged downwards in the US, but upwards in Europe – a sign perhaps of the can-do optimism inherent in the US economy.
A slow-motion brake pedal
Then there are the usual lags in the economic impact of monetary tightening, estimates of which have also always been within a fairly wide range. “Imagine driving a car that has a ten-second delay after you step on the brake pedal before the brakes actually do anything,” says John Mauldin in his Thoughts From The Frontline newsletter. “There would be more than a few wrecks.” But that is what central banks have to do.
Given this backdrop, it’s no surprise that the International Monetary Fund’s (IMF) forecast that Britain will be the worst performer in the G7 this year was widely dismissed; the organisation is notorious for missing the 2008 crisis (along with everyone else) and underestimating growth after the Brexit vote. Its forecast of long-term real interest rates returning to pre-Covid levels also incurred criticism this week, as it implies that the economy will continue to struggle over the next few years. The IMF’s long-term outlook may prove superior to its short-term ones, says economist Julian Jessop, but “better policy choices that boost productivity and growth” can prevent its scenario unfolding.
The IMF’s prediction on real-interest rates, however, is a reminder to focus on the big picture and trends, not the short-term, one- or two-year noise. And the big picture hasn’t changed. Whatever the global economy does in the next year or two, historical precedent and stubborn core inflation (see page 12) in the developed world point to price rises being stickier than widely expected – a dearth of workers and the retreat from globalisation presage the same. The structural stagflation scenario we have been warning about for some time remains likely.
Do people realise what that could do to their money? Perhaps not. A survey by Aviva suggests that only 37% of Britons understand compound interest on savings, and just 44% grasp the impact of inflation. In other words, 66% don’t realise that with inflation at 10%, the real value of the money in their savings account would halve in 7.2 years. If they did, we would also hear a lot more about stocks and inflation: the total return of the S&P 500 in the stagflationary 1968-1982 period was -27%, notes Deutsche Bank. Bring on Rishi Sunak’s maths lessons (see page 16). Nobody knows anything.
Andrew Van Sickle editor@moneyweek.com
“It appears the majority of Britons don’t understand what inflation does to money”