I don’t remember where I heard it first, but one of my favourite aphorisms compares forecasting with urinating into the wind —we think we’re hot, but we’re anything but. Yet, forecasting —guessing the shapes of things to come —is vital for public policy.
For example, the bean counters in Canberra’s Parliamentary Triangle need to know how much dough is likely to be in the coffers in the coming years so that the Government can decide on whom or what to tax or subsidise.
When it comes to forecasting, extrapolating from the past is often a good place to start. If the sun comes up every morning on the east, then it’s probably a safe bet that it will be so tomorrow as well. We don’t need to have a theory of the universe to make that guess. Unfortunately, most economic variables don’t move with such regularity. In economic forecasting, trend is our friend, most of the time, except at critical junctures when it’s not.
So, economist forecasters rely on narratives, stylised stories, okay models if we want be formal about it. Models give us a framework to base our forecasts on, so that we can say “assuming XYZ happens, ABC will follow”, and when A and C happens but B stubbornly refuses to materialise, we can explain it by looking at the assumptions.
For example, we might expect if the economy is growing at a brisk pace, so will tax revenue. So, there should be a positive relationship between forecast erros (the deviation of the outcome from forecast) on economic growth and revenue growth. However, in some years — such as the first half of 2010s — revenue growth shortfalls were worse than might have been expected from economic growth shortfall. In contrast, in the post-covid era, revenue growth outcomes have had bigger upside surprises than might be expected from stronger-than-anticipated economic recovery and inflation.
This is shown in one of my favourite charts in the Budger papers (Chart 8.4, Budget Statement 8, Budger Paper 1):
Indeed, as the Budget Statement 8 shows, even in hindsight things aren’t always clear when it comes to the economy. Nonetheless, evidence-based policymaking requires our best guesses that we can tell a story about of what might happen tomorrow.
Stakes are, of course, much lower for our guesses to the Financial Times prediction for 2024. However, anyone who writes about politics and society and other matters of public interest should, from time to time, write down their calls and hold themselves to account. And it’s a fun thing to do.
The first question FT asks is ‘Will Donald Trump become US president again?’. My answer, echoing that of Edward Luce, is NO. The American presidential election will be the largest media story of the year. The result will have profound consequences for the world. And I plan to avoid all the commentary and write nothing about it beyond my expectation that a combination of strong economic fundamentals and the fear of Trump 2.0 will cement a Biden re-election.
My answers to the rest of the FT challenge follows, with some observations (where none is offered, it means I don’t know any better than to question the expert opinion).
Will 2024 surpass 2023 as the hottest year on record? YES
Will the Israel-Hamas war trigger a full-blown regional conflict? NO
While that part of the world will remain volatile, none of the major powers wants a conflagration.
Will the US achieve a soft landing? YES
I think the cool central bankers have got this.
Will Keir Starmer become UK prime minister? YES
Though, technically the election could be pushed as far back as January 2025.
Will China’s economic growth crash to 3 per cent or less? NO
I have been reading up on China, and plan to write about it.
Will a change of president in Taiwan spark a Chinese attack? NO
See above.
Will the US and the EU keep funding Ukraine? YES
However, the details and fine prints will probably change.
Will Ursula von der Leyen secure a second term as European Commission president? YES
Will the Bank of Japan raise rates above zero? YES
Robin Harding says that the BoJ is unlikely to raise rates above zero, though market expects rates to rise from the current negative territory. I think we will see a very small positive rate. At this stage, no plans to write about Japan.
Will the ANC vote fall below 50 per cent in South Africa’s election? YES
It will be momentous. Will I write about it though?
Will Argentina dollarise its economy? NO
I do plan to write about Argentina, but perhaps more as economic history than their current woes.
Will renewables overtake coal in global electricity generation? NO
Will investors go heavily back into bonds? YES
Will X go bankrupt? YES
Will Sam Altman be sacked again from OpenAI? NO
Will capital markets reopen for IPOs? YES
Will Novo Nordisk end the year as Europe’s most valuable company? YES
Will female pop stars out-earn the men in concert tours? NO
As the FT expert explains, it depends on who is counted as a star.
Will Britain return the Parthenon marbles to Greece? YES
I will do a forecast reconciliation in a year’s time. Meanwhile:
Further reading
Status threat, not economic hardship, explains the 2016 presidential vote
Diana C Mutz, 23 April 2018
Shoulda, woulda, coulda: why FOMO won’t let go of us
The pandemic suspended our fear of missing out. Did it also teach us how to handle it better?
Josh Cohen, 26 Sep 2022
What Is Going on wiþ China’s Economy?
No, I do not understand China's two generations of successful, economic growth; no, I do not know whether China is now in the middle income trap; I do suspect Adam chooses concept of "polycrisis"...
Brad DeLong, 31 Aug 2023
Higher-for-Longer Interest Rate Environment is Squeezing More Borrowers
Elevated inflation means central banks may have to keep policy rates higher in a way that stretches the capacity of borrowers to repay debt
Tobias Adrian, October 10, 2023
Daron Acemoglu and Simon Johnson, 6 Nov 2023
Javier Milei implements shock therapy in Argentina
His government plans to cut spending by 3% of GDP. Will society tolerate it?
The Economist, 13 Dec 2023
War, peace and the return of history in 2023
Adam Tooze, 2 Jan 2024
Noah Smith, 4 Jan 2024
The Unpredictable But Entirely Possible Events That Could Throw 2024 Into Turmoil
A collection of futurists, political analysts and other prognosticators on the possible Black Swans of the presidential campaign.
Politico, 5 Jan 2024
Inflation “falling as fast as it went up”
Leith van Onselen links to Shane Oliver, 10 Jan 2024
Eight charts illustrate 2023’s extreme weather
Will 2024 be worse?
The Economist, 12 Jan 2024
Charts Spotlight Inflation, Economic Growth, Globalization, and Climate Change
A look back at the most popular charts on IMF Blog in 2023
12 Jan 2024