The only purpose of economic forecasting is to make astrology look respectable.

Those famous words attributed to economist John Kenneth Galbraith may have been said in jest by him. But the central bankers of major developed economies have bent backwards to validate it in recent years.

Few days back, Jamie Dimon, the long running CEO of global banking giant JP Morgan Chase, called out central bankers for being ‘100 per cent dead wrong’ on economic forecasts.

He called out their poor track record and highlighted the need to prepare for ‘possibilities and probabilities’ rather than forecasting a certain outcome as no one has got these things right.

Whether it is the US Fed, BoE, ECB or the BoJ, the globally influential central banks have all got it completely wrong (see table). For instance, even in September-October 2021, the median forecasts of members of the US Fed were indicating only a fed funds rate of one per cent by end CY23.

In reality, the current fed funds rate is at 5.37 and, based on their latest projection, may end CY23 at 5.6!

And this is not first time that developed market central banks have been so off the mark . In 2007, just before the housing bubble burst and the global financial crisis began, the then-Fed Chairman Ben Bernanke infamously claimed that the sub-prime housing crisis was contained, its impact limited, and that there wouldn’t be significant spillover effects. He couldn’t have been more wrong!

The Consequences

The recent market turbulence largely results from excessive reliance on inaccurate inflation forecasts, and now the consequences are becoming evident.

While 10-year bond yields in major economies are at 10-15-year highs, the pace of increase is unprecedented even if one goes back three-four decades.

This has complicated an over leveraged global financial system which is finding it hard to adjust to the continuing impact of these abrupt moves in recent years. The inability of a even serious conflict (like the Israel-Hamas situation) to have a cooling impact on bond yields in supposed safe havens such as US treasuries reflects the multitude of uncertainties and concerns that bond investors currently face.

What lies ahead

With volatility continuing in the bond markets, equity markets, including in India, are bearing the brunt as their attractiveness is also dependent on the benchmark bond yields.

Current equity market levels in major markets, including India, still reflect optimism about a soft landing for the US and global economy next year. Many economies have shown remarkable resilience this year, despite earlier predictions of a 2023 US recession.

It’s worth noting that recessions, such as those in 2008 and 2001, often occur when they’re less expected. For instance, in October 2007, the US Fed projected 2008 GDP growth of 1.8-2.5 per cent, but the recession had already begun in the October-December 2007 quarter, with GDP declining by about 4 per cent over the next 18 months. Similarly, the US Fed didn’t anticipate the 2001 recession.

Compared to the above central banks, India has fared relatively well . In fact, economist and Nobel Laureate Joseph Stiglitz once said how if the US had had a central bank chief like YV Reddy (then RBI Governor), the US economy would not have been in a mess (referring to global financial crisis). But nevertheless, we faced collateral damage then due to bad forecasts of other bankers and must be on the guard this time around as well.

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