There's a well-known publication from The Economist magazine, which this year is called 'The World in 2011' and which is always an interesting read. In it, various experts prognosticate on what is coming up in the following year. I have a copy of 'The World in 2008,' which was probably written some time in the middle of 2007, while we were still in a boom but when the economic storm clouds were already gathering. The cover image shows a (Chinese) dragon, and the magazine went on at some length about the Beijing Olympics. Strangely enough, the greatest recession for sixty years (2008-20??) was not foreseen in the magazine, even though the world's great and good (and a few Nobel Laureates) contributed to the publication. Each year the publication takes a hard look at its forecasts from the year before and, although it gets a few of the basic predictions right (the Olympics will take place, there will be an election in countries X, Y and Z), it seldom manages to predict the unlikely events (the Black Swans) that end up making the news and shaping our destinies.
While reading from the third Harry Potter book to my daughter Jemima last night, I was struck by the fact that Harry, Ron and Hermione were off to a 'Divination' class. When Jemima asked me what that was, I told her that it was a course in telling the future. In the wizarding world, that would entail the use of dragon's claw and dried frog's entrails, but we in the 'Muggle' world have our own methods of divination as well.
Analysts are the new wizards, in many ways. They do not use a crystal ball, but instead use computer-based models (and probably their own intuition) to try to foresee what lies in store for the companies they cover. (Getting an analyst to 'cover' your company can be a major coup – it shows that at least someone cares about you. If no analyst sees fit to cover your company, then no-one is likely to invest in you – the death knell for any listed company). They will take all of the company's past results, look at the wider context of the company's operations, see what its competitors are doing, and then try to extrapolate all this data into the future to guess what the company will achieve.
You will often see news articles where a poll of analysts has resulted in a kind of 'meta-forecast' – for example that the average forecast of six analysts says 'such and such.' This kind of thing – the 'wisdom of crowds' – can be very effective, since although each analyst might have an imperfect understanding of the situation, they should cancel out each other's errors. Their opinions are reported as a kind of benchmark, so that when a real-world company manages to beat the analysts' expectations, the company is reckoned to have done a good job, by out-performing these expectations. I have yet to see any CEO or any analyst point out the possibility that all of these analysts could have been wrong in their expectations, or that the company has managed their expectations so well that it was bound to out-perform them. No, that would be too cynical a viewpoint to take, wouldn't it?
It's funny how analysts' expectations can be so similar for a company. I would love to see the forecasts of analysts covering the same company who have not been allowed to see forecasts by other analysts. I would bet that they would diverge a great deal more than they do now, when they are allowed to see each other's predictions.
What amuses me (if any economic theory can make you laugh) is that the same data can be interpreted so widely by different people. Take, for example, the Monetary Policy Committee of the Bank of England: this team of nine has to decide whether to change interest rates and/or to indulge in more 'Quantitative Easing.' When presented with the same data, they come to widely differing conclusions: four want to increase interest rates, five want to keep it the same. Five want more QE, four want none. In the same way, expert medical witnesses at a criminal trial can flatly contradict each other. In that case, surely one or both of them is wrong?
What I am getting around to saying, in my round-about way, is that forecasting is a fraught business. In the cement industry, it is a minefield. One respected and professional forecaster has had to change his forecasts repeatedly over the last three years, as negative changes in reality outpaced the pessimism of his own predictions. Now that conditions are stabilising (at the bottom of the cycle), his forecasts are likely to begin to become accurate again as all the indicators align in a positive direction. In the same way, CEOs and CFOs in the cement industry around the world have wisely declined to give their opinions for the future over the last couple of years, simply because they had no idea what was coming up around the next bend. Now that things have settled down a bit, we can expect to see a few more (positive) forecasts floating around.
As for my economic forecast for the world in 2011, I think that it will be better than it was in 2010 – just so long as nothing unexpected comes along.