The Spring is Nice, but then Comes the Fall
The much awaited European Commission Forecasts for 2013-14 are out. What do they say, in a sentence? That the situation is grim, but that the EU is gradually overcoming the headwinds. So that, surprise, surprise, the second half of the year will be better.
I guess we already heard that. Every Spring forecast depicts a negative situation, and predicts an improvement in the Fall. And every year the Fall turn out as mother nature meant it to be, worse than the Spring.
I made a back-of-the-envelope exercise. The following figure depicts the forecasts error for each year of the Commission’s Eurozone GDP growth estimates from 3 different time horizons. The same year Fall forecast, the same year Spring forecast, and the previous year Fall forecast. To make it clearer, the three bars for say 2012, represent the forecast error of the Fall 2011 forecast (blue), of the Spring 2012 forecast (red), and of the Fall 2012 forecast (yellow).
I am not expert enough to judge whether these errors are “large” or “small”. Forecasting is a very difficult exercise, most notably in times of acute crises (the Commission underestimated both the severity of the recession in 2009, and the rebound of 2010). Yet, even a casual observer like me cannot help but notice two things:
- The Commission tends to be overly optimistic, and forecasts turn out to be in general higher than actual values. It should not be like this. While I expect a government to inflate a bit the figures, a non-partisan, technocratic body should on average be correct.
- Related, it is also surprising that in November of the same year the Commission is still consistently overoptimistic (yellow bar). Let me restate it. This means that in November 2012 the Commission made a mistake on GDP growth for 2012 (and in 2008-09-10-11…). November!
Taken together these two things seem to point to a political use of the Commission’s forecasts. Being overoptimistic, the people in Brussels first try to deflect criticisms of the austerity measures they help impose to most European countries; and second, probably, they hope to trigger the confidence fairy that is supposed to compensate fiscal consolidation and lift the EMU economy from the hole in which it put itself. “Look, things will be better, let’s go out and spend!”. Vain attempt, if you ask me…
If we take the average error of the past 5 years, and assume that the Commission current forecasts are equally wrong (ok, this is just a game, it really is not rigorous!), we have this:
Then I have my own forecast for growth in the EMU for 2013. It ranges from -0.54% to -1.14%. The Commission forecasts -0.3%. We’ll see…