WORLD ECONOMY PLODS ON IN THE FOG / THE FINANCIAL TIMES EDITORIAL ( VERY HIGHLY RECOMMENDED READING )

World economy plods on in the fog

Published: September 17 2010 19:44

Economic forecasting, that art of the impossible, is more aptly called nowcasting. As recent about-turns should remind us, economic predictions are better guides to current perceptions than to future outcomes. The public is advised to learn to love uncertainty.

In the past 10 days, both the Organisation for Economic Co-operation and Development and the European Commission have issued updated economic forecasts. Like everybody else, they were wrong-footed by Europe’s strong growth in the second quarter, powered by Germany’s roaring 2.2 per cent quarterly rate and a respectable 1.2 per cent rate in the UK. Yet they drew quite opposite lessons. The OECD lowered its predictions for the autumn, presumably thinking the economic fuel had run out. In contrast, Brussels expects “some momentum ... to feed through” and nudged its expectations up.

The result are predictions so wide apart that at least one of the two august institutions will soon be proved quite mistaken. The divergence is particularly arresting for the core euro countries – especially as we are well into the forecast period. In the third quarter, the OECD thinks France and Germany are adding only 0.2 per cent to output – and it expects Italy to shrink slightly. The Commission’s rosier forecast has all three press ahead by around half a percent.

It would be rude to suggest that this makes forecasts look like so many draws of numbers from a hat. Besides, the two bodies have one prediction in common: in most places output will grow less fast in the second half of 2010 than in the first. This is supported by a host of indicators, such as stalling or falling confidence measures and purchasing managers’ indices. No wonder talk of a double-dip recession is again on everyone’s lips.

Even if a slowdown is happening, however, it is less a portent of a double dip than confirmation that the recovery will be a long slog. That is the historical norm after financial crises; it was always the most likely dénouement of this one. Demand is restrained by private and, soon, public deleveraging. As for supply, it will take time for the most boom-scarred countries – where much now-unemployed labour worked in construction – to shift resources into more worthwhile and sustainable activities. And the transmission of credit, by which aggregate demand and supply could more easily bootstrap each other up, is broken.

With such unreliable guides to the future, how is one to make up one’s mind? One could do worse than take the advice of Piet Hein, the Danish aphorist. Flip a coin – not to leave choices to chance, but because “the moment the penny is up in the air, you suddenly know what you’re hoping”. Hoping, no doubt, that where their predictions agree, the Commission and the OECD will both be proved wrong.

Copyright The Financial Times Limited 2010.