Taking stock of the consensus

Macroeconomic forecasting is hardly an exact science, with the starting point for anything beyond 2 years usually "trend".  Critical to financial markets is not the level of forecasts but taking a view on whether the consensus are likely to revise numbers up or down.  The "consensus" in this case is the average if a bunch of banks, financial institutions and some independent forecasters.

It is interesting how consensus forecasts for many countries have evolved over the last couple of years and even more recently.  Looking at the US for example shows that since 2010, initial forecasts for the next 1-2 years have been far too optimistic.

And for all the current optimism about the US economy, growth more recently has only been revised down.  The risk is that it moves down further for 2013 given the likelihood of a weak 2Q13 number.

2014 forecasts are probably safe for now. But consider that weaker growth in 2013 and unchanged projections for 2014 means that the level of GDP will be lower by the end of 2014.

The consensus outlook for China has seen a dramatic turn in the last few months.  Earlier in the year it was expected that 2013 would be stronger than 2012 as the economy recovered from a cyclical slowdown and change over of leadership allowed for fresh policy direction.

But what has become clear is that the new leadership are less concerned with slower growth and more worried about mounting financial risks than their predecessors.  

This has not only leaked into 2013 forecasts, which are back peddling quickly, but also into 2014, with concerns about a structural headwinds to growth starting to become a big issue.  

I think the consensus will probably have to come down a bit more, but soon there maybe an opportunity where the consensus becomes too negative.

In some ways it can be easy to get in front of the consensus crowd, as they tend to only update numbers after major data releases which tend to be lagging.  For example, the consensus on Australia hasn't moved very much from the annualised rates of growth in the last 6 months, while 2014 has edged down a little.  

Even though the risks seem to be rising that growth will be weaker, forecasters will likely wait to the next GDP release to put those numbers through.

The stability of the Australian consensus vs. the rapid fall in Chinese forecasts is quite a surprise.  Australia does have more going for it than commodity exports, which will still be strong regardless of Chinese GDP forecasts, but surely a changing Chinese picture changes the risks to investment in Australia.