Tag Archives: forecast

Forecasting 2016 Economic Developments & Candidates’ Reactions

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     As the new year starts, Politico asks a set of economists for forecasts.  Prognostication from 23 appears at “Could the Economy Tank in 2016?

By the way, I think my forecast last time, two years ago, turned out to hold up pretty well:

Something important will get better in 2014: Fiscal policy will stop hurting the economyThe biggest impediment to economic expansion over the last three years has been destructive budget policy coming out of the CongressThere are good grounds for optimism in 2014. For the first time in four years, Congress will probably not inflict contractionary fiscal policy on the American people. If the government sector stops making a negative contribution, that will show up as economic growth.”

This time I focused on the following question from Politico:

Q: How will the 2016 presidential candidates have to adapt to economic realities and unforeseen developments in the coming year, such as the risk of recession, as they make the case to voters about their own economic visions?

A:  Recessions are not forecastable.  A downturn is no more likely in 2016 than in a typical year, nor less likely.

The next president will, like his or her predecessors, have to shift gears from the campaign and adjust to a very different set of developments and realities upon taking office.  But this is because of politics, not mainly because of uncertainty regarding what lies ahead.   The adjustment process will not begin until after the election, even if major new developments in the domestic or global economy take place during 2016.  The polite way to phrase it is to observe that “politicians campaign in poetry and govern in prose.”

Republican nominees, for example, always promise to cut taxes, increase military spending, protect seniors, and yet to run a strong budget balance, even though that combination is arithmetically impossible.  Democratic nominees too make unrealistic claims about how they will be able to combine spending increases with budget discipline.   Unforeseen disasters – financial, economic, national security – do not cause candidates to rethink their plans, but only to double down.   It is only after they take office that they are forced to confront the arithmetic, and sometimes they can postpone facing up to it for several years.

Some presidents adjust to fiscal realities immediately, during the presidential transition (Bill Clinton), some after a year or two of fiscal failure (Ronald Reagan and George H.W. Bush), and some later still (George W. Bush).   But none do it before the election.

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Currency and Commodity Markets in 2015

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This is the third and final installment of an interview on the outlook for the New Year.

Part 3. Forecasts for International Currency and Commodity Markets

Q – What is your forecast for the U.S. dollar? Do you think maintaining the strong dollar could ultimately help the U.S. economy, or hurt it?

A – The appreciation of the dollar against the euro and the yen in 2014 was precisely what we should have expected from the economic fundamentals: the strengthening of the US recovery at the same time that the euro and Japanese economies have been slumping and the end of US monetary easing at the same time that the ECB and the Bank of Japan have redoubled their efforts at monetary stimulus.

When trying to forecast exchange rates, one does well to recall the “random walk” principle.  One is doing well if one gets the direction of movement right slightly more than half the time.  Having said that, I would guess that the dollar is more likely to appreciate further in 2015 than to fall, for the same macroeconomic reasons as last year.

Would that be a good thing?  Moderate appreciation of the dollar against the euro and yen is the natural concomitant of the monetary and real economic fundamentals.  Europe and Japan need the stimulus of easy money and competitively priced-currencies.   If the US recovery were to falter in the future, the Fed could reverse its plans to raise interest rates and the dollar in that case would probably come back down.   But as of now, the US economy seems to be doing well.

Q -The oil price continues to fall to near $50 a barrel. How do you forecast the oil price for 2015 and beyond? How will it impact the world economy?

A – Among the reasons for the fall in the price of oil, of course, is the US shale energy boom (techniques associated with “fracking”).  Even though the new shale activity will moderate at these low prices, its ability to resume relatively quickly will work to prevent oil prices from rebounding.

The price decline goes beyond oil. Mineral and commodity prices have also fallen over the last year, at least in terms of dollars.  Disappointing levels of economic activity in much of the world are an obvious explanation.  But the business cycle doesn’t explain why commodity prices are down especially in the US, where economic activity strengthened in 2014.  The Economist commodity price index in 2014 was actually up in terms of euros; it was down only in terms of dollars, though that is what everybody focuses on.

The other factor is monetary policy: the end of quantitative easing in the US and renewed monetary stimulus elsewhere.  That is consistent with some commodity prices falling in dollars while simultaneously rising in terms of other currencies.   We could see more of this in the coming year.

I would say that oil prices and other commodity prices are more likely to continue falling in 2015 than to rise.  To the extent that oil prices are down because of the fracking boom or because some of the worst geopolitical fears have not materialized, this is good for the world economy (even though bad for oil producing countries).

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The World Economy in 2015

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I am posting in three parts the results of an interview on the year-end outlook.  (The questions come from Chosun Daily, leading Korean newspaper. The interview is to be published there in January.)

Part 1. The Global Economy in 2015

Q: Around this time next year, which countries do you predict will be the winners, and which will be the losers of the year?

A: The big gainers will be oil-importing economies, particularly China, India and other Asian countries.

Russia will be the big loser. It has now become clear to all how fragile and vulnerable the Russian economy was, especially with respect to world oil prices. It is easy to forget that commentators a few months ago were declaring Russia less vulnerable to Ukraine-related sanctions than Western Europe. Before that, they were judging the $50 billion 2014 winter Olympics in Sochi a triumph.

Q: Even up to last year, Russia was considered a promising market. Which country could be the ‘Next Russia’ in 2015?

A: Cuba. Continue reading

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