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Entries in Interest Rates (14)

Wednesday
Nov282012

Week 48, 2012: Clash of the Titans

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Summary: The second annual ERC Clash of the Titans event, which pits professors from Oxford, Cambridge and LSE against each other in an economic predictions competition, is coming up next week on the 4th December (as of the 28th November, there are only 50 tickets left, which you can buy here).  We take a look back at how last year's predictions turned out.

What do the charts show? The four charts summarise the predictions given by the three professors (John Muellbauer from Oxford in dark blue, Hashem Pesaran from Cambridge in light blue, and Danny Quah from LSE in yellow) across four categories.  The solid black line shows the past data they were equipped with when they made their predictions, and the dotted black line shows the real outturn. The exception is for interest rates, where all three correctly predicted they would stay at 0.5% all year.

We also asked members of the audience and visitors to the ERC website to share their forecasts, and the average of those is given in dark red.  The shaded area shows the full range of predictions, with the colour getting darker as more people predicted that number.

Why are the charts interesting? As the ERC President, Lord Lamont, likes to point out to us, all economic forecasts should be taken with a pinch of salt.  However, they do provide an interesting snapshot of the mood at the time they were given.  For example, the consensus last year was that unemployment was going to continue to steadily rise towards 9% by the end of this year, with some people thinking it might reach as high as 13%.  That turned out to be overly pessimistic, however, as it peaked in the fourth quarter of 2011 and has been slowly declining ever since.  The mood in general last December was bleak, and although our average forecast was for inflation to decrease over the period, very few people thought it would fall as far as it has.  Most people agreed with the three professors that interest rates would stay at 0.5%, but enough thought they could rise in Q3 of this year to bring the average forecast up to 0.6%.

GDP growth was the only category in which the consensus was too optimistic.  Despite three consecutive quarters of growth going in to the Clash of the Titans event, most people foresaw no or negative growth in Q4 of 2011 and Q1 of 2012.  However, less than a third of our forecasts predicted a second period of recession, and even less thought there would be three consecutive quarters of negative growth.  Despite all of that, though, the high growth in the third quarter of this year came as a surprise to even the most optimistic forecasters.  But will it last?

You can find out what our new batch of professors think at this year's Clash of the Titans, and you can share your forecast with us here.