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May 14 2010

The c-word is back

Published by at 9:00 am under Opinion,Top Stories

When the economic environment changes too fast for economists to follow, that’s always a bit disappointing to me – big economist fan that I am. 

To revise 2010 GDP growth forecasts for EU countries up in the midst of the biggest crisis the Euro has experienced to date and with the EU facing major “re-engineering work” to avoid disintegration – as economists have done in today’s Financial Times Deutschland (FTD) and in Handelsblatt – is more than inappropriate. It’s a bit silly.

The 1st quarter GDP numbers for many EU countries are on the table now and they look good – growth returned to many EU countries in the first quarter. In many countries the numbers surprised on the upside and when that happens one can (normally) expect economists to revise their calendar year forecasts upwards. But not this time around. Why? Because these are pre-crisis numbers and secondly, there is nothing “normal” about the macro-economic environment in the EU on 14 May 2010.

Only economists who underestimate the role of the c-word (confidence) in the growth process will tinker with growth forecasts at this point.

To date no economist has mentioned it (or, I haven’t read anything to that effect anywhere yet), but the Greek tragedy and subsequent Euro and EU uncertainty will most certainly brake growth in the second quarter – and maybe even thereafter. No-one knows for how long. In the worst case, EU growth might even be hampered by “a lack of confidence flowing from this uncertainty”,  up to the point where it is clear the “new EU” has a fair chance of working. In other words, beyond the point where it is clear how the “new EU” will look.

We might be looking at a few years here. In any case, the situation is too volatile to try and forecast the EU economy (or any individual country in the EU) as far forward as December 2010.

(At least) until things have calmed down somewhat, journalists should hold back on economic forecast stories and “protect” economists who threaten to make fools of themselves by revising their GDP forecasts up.

One response so far

One Response to “The c-word is back”

  1. adminon 25 May 2010 at 8:05 am

    The Financial Times Deutschland (FTD) today published the confidence indices for May and they were down. But, and this is the interesting point, the FTD quoted economists who reckon the confidence shock “will not affect growth materially in 2010 and 2011″.

    They must be assuming no further confidence shocks. If that is their assumption, I must say I think it’s an unrealistic one.

    The EU needs to be “rebuilt”. Sooner or later this truth will hit the market and the politicians. For an EU to be viable, it will have to be very different from the existing one. So different, that countries will have to decide afresh whether they want to be part of it. And, when the time comes, many current members may decide not to be members of the proposed, new EU. So, a smaller EU will come into existence.

    All of this will drag out over time and all of this can definitely not happen without shocks to the business cycle. I think there are economists here in the EU who see this scenario on the horizon. But, until now, no-one has dared to spell it out.

    Christo

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