As Danish physicist Niels Bohr aptly said, “Prediction is very difficult, especially if it’s about the future.” Truer words could not have been spoken, especially if one’s task is to surmise the future trajectory of Europe’s fragile economy.
Thus far, many renowned economists and well-respected institutions have honed their best algorithms, dusted off their proprietary models, and peered into their crystal balls all in an effort to ascertain where the eurozone may be headed. I, too, have made an attempt at modelling the future course of Europe’s economy, but I think that readers will be better served by surveying the current landscape of predictions. Where do prognosticators tend to agree? Where do they disagree most? Which countries should we confidently expect to grow? Which will assuredly contract? In my opinion, answering these questions will lead us to a more nuanced understanding of risks pervading the eurozone in 2013.
In the table below, I have aggregated the results from a number of 2013 GDP forecasts for the eurozone, Germany, France, Italy, Spain, Greece and the UK. By no means is the list exhaustive, but it should be representative of the variety of opinion. Predictions were gathered from a host of public and private entities including the International Monetary Fund, Eurostat, Bundesbank, Moody’s, Fitch, and others.
The “Forecasted Value” column is an equal-weighted average across each prediction in the sample. By doing so, I assumed that each prognosticator had as good a chance as any other prognosticator to accurately predict future GDP growth.
The column entitled “Standard Deviation” is just what it sounds—the standard deviation of predicted GDP growth rates by country in the sample.
The columns labelled “Minimum” and “Maximum” provide the lowest and highest estimates from the sample.
The “Number of Observations” column refers to the number of predictions I was able to acquire for each country.
(Click image to enlarge)
Based on the above table, a few things jump out. First, there is tremendous disagreement over the future trajectory of Italy’s economy, as evidenced by the standard deviation of 0.87%. However, there seems to be a relatively narrow range of opinion on the potential growth rates in Germany and Spain as evidenced by the low standard deviation. Additionally, the vast majority of predictions favour Germany and the UK experiencing positive, albeit muted growth. Meanwhile, countries like Spain and Greece appear doomed to contract.
Italy Facing Major Uncertainties
What could be the uncertainties facing Italy, in particular, that would cause predictions to vary so wildly? First, escalating political uncertainty leading up to the general election later this month likely adds considerable variation to GDP forecasts as the next government may or may not scale back the structural reform program installed by the technocratic Mario Monti.
Electoral uncertainty is only part of the problem, however, as confidence indices have yet to offer much of an indication which way they will break. Business Confidence in Italy, as reported by ISTAT, has historically averaged 100.3, but in December the index read 88.9, marking the ninth straight month with a reading below 90. Some analysts foresee Business Confidence reverting to the mean if ECB’s Outright Monetary Transactions (OMT) program takes hold and bond yields fall further.
On the consumer side, Italy’s Consumer Confidence index, also produced by ISTAT, points to continued weakening with a December reading of 90.7 far below its historical average of 111.5. The most pessimistic forecasts have likely assumed that sentiment will worsen, especially if Italy’s new government feels the need to implement further fiscal tightening to compensate for falling tax receipts. Another round of fiscal tightening should prove to only exacerbate the problem.
Germany Holding Up Comparatively Well
The relative consistency across forecasts for the German economy points to, I think, widespread expectations that Germany will remain in a relatively strong competitive position relative to the rest of the eurozone. While Germany has likely slipped back into a recession at the end of 2012, its continued growth in exports to both the UK and the US should offset declining exports to its eurozone partners.
Furthermore, Germany remains one of the few eurozone nations to have avoided a decline in private consumption undoubtedly due to the resilience of its labour market. Most projections foresee a slight increase in German unemployment in 2013, but with German unemployment already near historic lows, a slight increase in the rate should do little harm to consumer spending.
