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ECONOMIC FORECAST PROBABILITIES

In addition to their regular forecasts for the major economic indicators, each January we survey our panelists for their predictions of how the various economies are most likely to perform over a given time horizon. We undertake special surveys of economic forecast probabilities across our publications Consensus Forecasts, Asia Pacific Consensus Forecasts and Eastern Europe Consensus Forecasts.

This special survey aims to assess the risk of these other 'non-consensus' outcomes, which range wider than a simple examination of the highest and lowest central forecasts would suggest. In order to do this we asked our panelists to assess the probability that the variables covered would fall within the ranges displayed in the partial sample tables below, which allowed us to compile some rough probability distributions to identify those areas of greatest uncertainty in the economic outlook. The ranges themselves differ from country to country and from variable to variable, but were set so that the central range (the middle column in the tables and charts) encompassed the consensus forecast from last month's survey. The width of all of the ranges was chosen to reflect the standard deviation of central forecasts for each variable. The ranges are wider for those variables for which the economic outlook is most uncertain.


Consensus Forecasts Asia Pacific Consensus Forecasts Eastern Europe Consensus Forecasts
United States Australia Czech Republic
Japan China Hungary
Germany Hong Kong Poland
France India Russia
United Kingdom Indonesia Turkey
Italy Japan Bulgaria
Canada Malaysia Croatia
Euro zone New Zealand Estonia
Netherlands Philippines Latvia
Norway Singapore Lithuania
Spain South Korea Romania
Sweden Taiwan Slovakia
Switzerland Thailand Slovenia
    Ukraine


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In our January 2017 special survey of forecast probabilities, in addition to their central (most likely) forecasts in the consensus economic survey, we asked our panellists to assess the probabilities of a range of alternative outcomes for each of the listed variables, i.e. GDP forecasts, consumer prices and the current account in 2017, as well as for exchange rate forecasts (for the euro, the Japanese yen, the UK pound and the Canadian dollar) against the US dollar by the end of January 2018. This analysis is an attempt to quantify the risk that these economic indicators might turn out to be significantly higher or lower than individual forecasts currently suggest, and allows us to compile consensus probability distributions to identify those areas of greatest uncertainty in the economic outlook for the G-7 industrialized countries.


FOREIGN EXCHANGE RATES

Average probability of the following exchange rates falling within the ranges shown Depreciation vs. US$
between survey date and end-Jan. 2018
  Appreciation vs. US$
between survey date and end-Jan. 2018
-22% or
more
-22% to
-14%
-13% to
-5%
+/-4% +5% to
13%
+14% to
+22%
+22% or
more
Euro 1 7 22 43 19 5 2
Japanese Yen 4 8 18 45 18 7 1
UK Pound 2 5 24 47 18 4 1
Canadian dollar 1 3 16 52 20 6 2

euro us dollar exchange chart imageConsensus forecasts are mean averages of individual panellists' predictions of the performance of various indicators over a given time. However, most forecasters would also attach some probability to various – perhaps radically different – outcomes or scenarios. These probabilities provide a wider assessment of the risk attached to the consensus and are based on estimates of unexpected or extreme movements in key variables, such as exchange rates or commodity prices. These and other factors could alter a central forecast. Every year in January, we ask our panellists to supplement their central forecasts for GDP growth and inflation for the year ahead with a set of probabilities of the outcomes falling within specified ranges shown in the tables. The ranges differ from country to country and from variable to variable, but were chosen so that the central range (the middle column in the tables and charts) generally encompassed the consensus forecast from last month's survey.

We also show the probability distributions for oil prices as well as for the major forex cross rates of the G-7 currencies. Here, we ask for the probability of the percentage change in the exchange rate between now and January 2018 falling in seven comparable % ranges. Interestingly, many panellists ascribe a higher probability to GDP growth and inflation surpassing their central forecasts, namely for those covering Japan, the UK, Italy, the Euro zone, Norway and Spain. Indeed, going into 2017, there seems to be new-found optimism over the outlook which was missing this time last year when oil prices were near recent lows, deflationary pressures became more entrenched and Chinese financial jitters raised fears of another global crisis. This year, a pickup in energy costs (our contributors assign a 25% probability to Brent reaching almost US$70 by January 2018) has lifted the possible range of expectations over inflation. This does not mean that the G-7 and Western Europe are not facing some downside risks, though. Despite US consumption and investment forecasts rising, respondents assign a 37% probability to GDP growth falling below 2.1%. This is somewhat surprising given the expected boost to fiscal spending. The new US president’s protectionist rhetoric may also be weighing on Canadian probabilities.

UNITED STATES

GDP Growth, %
2017 consensus = +2.3%

% Probability

< +1.2

4
+1.2 to
+1.6

9
+1.7 to
+2.1

24
+2.2 to
+2.6

40
+2.7 to
+3.1

18
+3.2 to
+3.6

4
> +3.6


1
Consumer Price Inflation
2017 consensus = +2.4%

% probability
< +1.4

2

+1.4 to
+1.7

10

+1.8 to
+2.1

27
+2.2 to
+2.5

44
+2.6 to
+2.9

13
+3.0 to
+3.3

4
> +3.3


1

US GDP Growth chart imageRecent 2017 GDP forecasts for the G-5 countries are indicating signs of slight improvement. In the UK, this recovery follows a setback to the outlook in the wake of Brexit. Even now, the GDP consensus remains well below expectations prior to the vote. Germany and France also suffered from some loss of sentiment in the immediate aftermath, but have since stabilised. The US outlook for GDP has strayed little from earlier forecasts. The surprise presidential victory for Republican Donald Trump triggered little unrest on the financial markets and, in fact, the stock market and US dollar have made broad gains. With the economy supported by strong jobs and earnings data, the Federal Reserve raised interest rates in December for the first time in a year. President-elect Trump’s planned spending splurge may speed up the rate of policy normalisation in the US going forward and provide more support for the dollar. In Japan, the failure to raise growth and inflation has led the government to delay a planned consumption tax hike for this year until 2019, and this may account for some of the uptick in GDP growth prospects. Despite extremely accommodative monetary policy, the Bank of Japan has been unable to kick-start inflation. The ECB has also encountered a prolonged period of deflationary pressures in the Euro area, although a sudden surge in December 2016 has buoyed expectations. A rebound in oil prices has contributed to this, while firms are facing an increase in factor costs. This has also been evident in the UK economy, following a heavy slide in sterling.

For further information, including economic data on other countries, see the complete study in Consensus Forecasts, January 2017.