The humble economist

All indications are that the world economy will experience robust growth in the coming months barring any oil shocks, outbreak of open hostilities in the Far East, collapse of the British economy following Article 50 notification, and a financial crisis akin to the Greek economic crisis of yesteryears. Economic models, revised since the election of Donald Trump and his recent economic policy pronouncements, indicate that notwithstanding all the uncertainties that bedevil us now, economic growth and international trade will see modest to decent acceleration this year. 

This is a pretty rosy picture and might appear to contrast sharply with the title of this article. However, allow me to throw in a word of caution about the sunny outlook I project. As a decent economist, I will first of all concede that my predictions are not 100 percent certain, i.e. I have only 75 percent confidence in my forecast. Secondly, I will also share with my readers about my heightened sense of foreboding given that 2017 has been widely characterised as a "year of uncertainty". Why does uncertainty matter? Human beings are driven not only by their economic instincts but also by their urge for self-preservation. When uncertainties increase, consumer confidence goes down and that leads to cutback in spending and business investment. 

Before I get into the details of my forecast, let me confess at the outset that the title of this op-ed came to my mind from the book The Argumentative Indian by Amartya Sen. But the similarity ends there. While the book by the Nobel Prize winning economist is based on his writings on Indian history, culture and identity, mine is a parody of the role and performance of fellow economists. In fact, my title can be considered an oxymoron. Economists are not humble and I have not come across any writing or theory by an economist that could be considered to reflect any modesty.

As I look into the future of the world economy in the post-Brexit and the post-Obama era, I am awed by what we have not done so well as economists. Why do I bring it up at this juncture? At the end of each year as I review my forecasts from past years, I often discover that I missed a few shots. Last year, I forecast, too boldly I will now admit, that British economy would prosper after Britain decided to vote for Brexit. Well, the results have been mixed so far. According to Financial Times economists they surveyed are gloomy on UK prospects for 2017, and feel that, "Growth will slow, incomes will be squeezed and investment delayed." 

On this side of the Atlantic, everybody was wrong, even the economists last year. The pollsters, political pundits, the print media, and all the prognosticators failed to see the mood of the voters and predict the election of Donald Trump. And the economists failed to see that the election results would give the economy an immediate boost. On February 3, the Labor Department announced a boost in job growth in January by 227,000 workers well ahead of December's gain of 157,000. So, it appears that the bombast of Donald Trump (or "big mouth" if you dislike him) has had some positive impact on the economy again defying the naysayers. 

Now let me eat the humble pie and confess that economists are often wrong when they discount the influence of non-economic variables on economic growth and market forces, and remarkably so when they take their own predictions based on sophisticated models too seriously. While we know that our forecasts are only as good as the assumptions underlying the models, and that in reality unpredictable forces, or uncertainties, can often derail our best laid plans, we hate to proclaim that "our forecasts have a margin of error of 50 percent." 

Fortunately, the pendulum is swinging and the mood has definitely changed even at the US Federal Reserve Board. The Fed, which sits at the helm of the world's largest economic body and is entrusted by the Congress to steer the economic ship of the nation judiciously, is throwing up its hand and announcing "we don't know". During the meeting of the Federal Reserve's Federal Open Market Committee on December 13-14, 2016, "[The FOMC members] pointed to a number of risks that, if realized, might call for a different path of policy than they currently expected," the minutes noted. "Moreover, uncertainty regarding fiscal and other economic policies had increased. Participants agreed that it was too early to know what changes in these policies would be implemented and how such changes might alter the economic outlook…. Moreover, many participants emphasized that the greater uncertainty about these policies made it more challenging to communicate to the public about the likely path of the federal funds rate."

Add to this, the cloud of uncertainty hanging over Europe where upcoming elections might overturn the cart in France, Germany and the Netherlands. Add to that the fate of the negotiations between the government of Theresa May and EU as Brexit terms are being worked out. Let us for a moment parse the sentence, "we do not know". Are we completely in the dark? The predictions were always encased in "margins of error" but now the margins have become wider. Another factor is that politics is now a "key driver of uncertainty". And most economists can relate to the anguish expressed by the Fed when it admitted that there was "considerable uncertainty about the timing, size and composition of any future fiscal and other economic policy initiatives, as well as about how those polices might affect aggregate demand and supply."

However, all said and done, 2017 will be a good year for emerging market and developing economies (EMDEs) including India, China, Bangladesh, the Philippines and Indonesia, even amidst heightened uncertainty. Global growth in 2017 is projected to rise to 2.7 percent up from 2.3 percent in 2016, led by a robust US economy. Growth in EMDEs will benefit from receding obstacles to activity in commodity exporters and continued solid domestic demand in commodity importers. 

Commodity prices, protectionism and China's economic performance are areas that present uncertainty. China is suffering from "financial imbalances" driven by corporate debt which surged by more than 60 percent to top 165 percent of GDP. According to Stratfor, "a nationwide debt crisis looms at Beijing's doorstep amid business defaults and bankruptcies, low industrial profits, winnowing returns on investment and the very real prospect of yet another slowdown in the real estate sector. How well Beijing manages these problems in the months ahead will, to a great extent, determine China's economic, social and political stability for years to come." 

Similar uncertainties remain closer to home. Areas of uncertainty for Bangladesh are currency, trade, and European markets. The reforms that various quarters are asking for remain a far cry affecting both domestic and foreign direct investment, and growth. While elections are two years away, we can only hope that the uncertainty and the maneuverings by political parties jockeying for power will not derail our march towards middle-income status.

The writer is an economist and a contributor for The Daily Star.