European Commissioner for the Economy Paolo Gentiloni gives a news conference on the winter 2023 economic forecast at EU headquarters in Brussels, on Feb. 13.JOHN THYS/AFP/Getty Images
Todd Hirsch is a former Calgary-based chief economist of ATB Financial and the author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.
“It’s difficult to make predictions, especially about the future.” That quote, attributed to both a physicist (Niels Bohr) and a baseball player (Yogi Berra), sums it up. Yet ingrained in our psyche is the never-yielding compulsion to predict the future.
No one knows this better than economists. I’ve spent most of the past three decades working on teams within various think tanks, companies and banks, trying to forecast the economy. And I’ve concluded that it’s a waste of time. Why?
First, we’re getting worse at it. The problem isn’t faulty mathematical models or econometric techniques. Rather, the problem is the growing number of things that hit us from out of the blue – the so-called “black swan” events that are, by definition, unforeseeable.
No one in 2019 predicted a pandemic. No one in 2021 predicted a massive ground war in Europe. No one in 2022 predicted a series of bank failures. (Yes, of course, some experts had warned of all of these things, but they were nowhere on economists’ radar.) The frequency of these sorts of events is growing at an alarming rate.
The second reason is that the economy, for reasons that aren’t quite clear, is behaving differently than it has in the past. Our predictions of the future are based entirely on patterns we’ve observed from the past. But now, those patterns are shifting.
Take the most recent data on the Canadian economy. The national GDP rose 0.5 per cent in January (month-over-month) and a preliminary 0.3 per cent in February. So on an annualized basis, growth is trending around 2.5 per cent in the first quarter – about five times the rate the Bank of Canada predicted.
The labour force numbers are another story. Over the past 12 months, the Canadian economy added 425,500 jobs, a growth rate of 2.2 per cent. Full-time employment was even more robust, up 2.9 per cent. None of this would be too surprising except for the fact that it has happened while the Bank of Canada has been slamming on the brakes. Far from slipping into an interest-rate-induced slowdown, the economy is defying gravity.
That, of course, could change. And a recession this year is still possible. The point is that, for whatever reason, economic indicators are not behaving as they traditionally have.
Finally, not only is economic forecasting useless, it can lull us into a dangerous false confidence. How many Canadians stuck with a variable-rate mortgage in 2021, when the Bank of Canada was saying (rather confidently) that mortgage rates would be staying low for an extended period of time? In the middle of the pandemic, this forecast seemed reasonable. The mortgage holders did their homework and listened to the forecasts of experts. But what a mistake variable-rate mortgages turned out to be.
I’m not suggesting that we shouldn’t make forward-looking budgets. That’s planning, not forecasting. Yet if the planning process is too dependent on some pinpoint economic forecast, it’s going to be a problem, because that forecast is going to be wrong.
The idea that anyone can predict GDP growth to a tenth of a percentage point is hubris. A better strategy would be to prepare for any possibility. That, to a certain degree, is what economic forecasters do when we apply a “high, low and base-case” probability to a range of scenarios.
But by assigning one scenario the “base-case,” we’re still trying to convince ourselves that we can get the forecast correct. And that leads us right back to the start, where we lull ourselves into a false confidence.
Prepare for any outcome. Plan around multiple scenarios. Be ready to react swiftly as economic situations change. Don’t become complacent, thinking you know what’s going to happen.
After all, Doris Day knew this all along when she sang: “Que sera, sera / Whatever will be, will be / The future’s not ours to see.”