Paris: Economists have come under fire for missing inflation targets, failing to foresee disruptions to global supply chains and predicting a recession that never materialized.
The coronavirus pandemic, Russia’s war in Ukraine, and most recently the conflict in the Middle East have made it increasingly difficult for experts to see clearly into the economic crystal ball.
European Central Bank President Christine Lagarde joined the chorus of criticism at the World Economic Forum in Davos, Switzerland, last month.
“Many economists are really a tribal group,” she said, referring to a lack of openness to other scientific disciplines.
“They talk about each other, but there are more men than women, but that’s another story,” said the former IMF chief and French finance minister. “But they don’t go beyond that world because they feel comfortable in that world.”
Some economists speak of their kind as having to break out of their comfort zone of Excel spreadsheets and rigid models.
Peter Vanden Hout, chief eurozone economist at ING Bank, said sarcastically that the world “has changed a bit.”
– Inflation mistake –
After years of low inflation, prices are rising as the economy reopens after the coronavirus pandemic, and after Russia’s invasion of Ukraine, President Lagarde and Federal Reserve Powell say price increases will only be “temporary” The price soared even further, betraying the system board chairman’s assurances.
Central banks have had to launch a series of interest rate hikes to combat inflation. Price growth has slowed in recent months, but policymakers are keeping interest rates high as they wait to see if they can lower them by the end of the year.
Lagarde acknowledged that the projections used as the basis for the ECB’s policy decisions were not always correct and that factors related to the crisis were not taken into account in the models.
“The model we currently use is unreliable because it has a lot of elements that are difficult to integrate,” Vanden Houte said.
He cited post-pandemic supply chain bottlenecks, labor shortages and geopolitical tensions.
Economists looked at things through the prism of the past and dropped the ball.
“It’s not the economic model that has failed; it’s the lack of imagination on the part of economists,” said Maxime Dalmé, an economist at Allianz Trade.
After 30 years of globalization where “everything went well,” Dahme said, “they were resting on their laurels.”
– An unprecedented recession –
Economists have warned that growth in developed countries could plummet or even contract in 2023 as central banks use interest rate hikes to stop economies from overheating.
Instead, economic growth in the United States accelerated last year, while the eurozone, excluding Germany, remained strong.
Earlier this week, the IMF raised its global growth forecast for 2024 to 3.1%, citing unexpected resilience in major advanced and emerging market economies, including the United States and China.
Alan Blinder, an economics professor at Princeton University, told AFP: “There is a mystery to the complete elimination of inflation.”
Interest rates suggested a recession in the US and indicators were pessimistic. In the 1970s, a recession was the only way out of hyperinflation.
Economists were once again accused of being too narrow-minded.
Vanden Hout said poor data quality and low survey response rates were to blame.
Christophe Barrault, director general of Market Securities Monaco SAM, said a new phenomenon also threw him a curveball. While savings drive consumption, businesses are “managing much better” high interest rates than in the past, he said.
~New year, new opportunities~
Nobel laureate in economics Esther Duflo told AFP in a recent interview that economists have fallen to the “bottom” of the list of most trusted professions and are less popular than weather forecasters.
Some people are trying to change it.
In July, the Bank of England appointed former US Federal Reserve Chairman Ben Bernanke to lead a review of its forecasting process after being criticized for failing to predict soaring inflation.
The Bank of Canada has decided to replace the old model with a more advanced approach.
“We all know that current models are no longer satisfactory for making good predictions,” Vanden Hout said. “We need to think differently, or at least extend the model by integrating other components.” – AFP