GUSTAVO GONZÁLEZ: 2022: the errors of the economists

https://www.batimes.com.ar/news/opinion-and-analysis/2022-the-errors-of-the-economists.phtml

The time has come to do what economists find so uncomfortable and what I find so useful: the annual balance sheet of predictions, with their successes and mistakes. I do this every year and I believe it is necessary to do so if we are to better understand the possibilities and limitations of the most important social science in our lives: economics.

There may be doubts as to whether it is this field that conditions culture, religion and the legal scaffolding of a society, or whether it is a consequence of all of these. But, in the end, economics is the scientific tool we have to try to understand and quantify the challenges of everyday life and the productive development of humanity.

The problem is not that it is not an exact science. The problem is when it is passed off as an exact science. It would be great if, in a country like this one, it were possible to predict what is going to happen in a year with decimal accuracy – it is a pity that reality is often too complex.

There are businessmen and politicians who laugh at sorcerers, but they pay well to those who promise them perfect projections in one, two and five years’ time. If it were possible, there would be more successful businessmen and politicians than there are now.

Inflation and GDP

The REM (Relevamiento de Expectativas del Mercado del Banco Central) is the Central Bank’s key survey. Month by month it summarises the forecasts of 39 participants, including 26 consulting firms and local and international research centres and 13 national financial institutions. All of them have a good reputation and are the ones that form the consensus on how well or badly the country is doing.

A year ago, the averages of their projections indicated that 2022 would end with an inflation rate of 54.8 percent.

The LatinFocus Consensus Forecast has a similar methodology. It records the average of the projections of 200 of the region’s leading experts. In December 2021, the forecast for Argentina for the coming year was 49.8 percent. 

This week, INDEC released consumer price index (CPI) data for November. Private estimates had anticipated between 5.5 and 6 percent. Finally, the figure was the 4.9 percent anticipated a fortnight ago by Economy Minister Sergio Massa.

And so, the cumulative figure for the first 11 months of the year is 85.3 percent, with a likely rate of more than 90 percent for the whole year.

Allowing the margin of error between projection and reality of the 39 participants surveyed by the Central Bank would lift it to 65 percent, with LatinFocus’ 200 respondents granted 80 percent.

Continuing with inflation, organisations such as the International  Monetary Fund and the World Bank have given up forecasting inflation in countries as complex as Argentina. But they do look to project annual growth of gross domestic product. This is still a difficult task though. In January, the IMF estimated that Argentina’s economy would grow by three percent in 2022. The World Bank was more cautious: 2.6 percent. The Organisation for Economic Cooperation and Development (OECD) went with a figure of 2.5 percent. The Central Bank’s REM poll estimated 2.9 percent; LatinFocus had 2.3 percent and United Nations Economic Commission for Latin America and the Caribbean (ECLAC/CEPAL), 2.7 percent.

Later in the year, back in March, two of the most important international credit risk rating agencies also gave their projections: Fitch estimated it at 1.7 percent. Standard & Poor’s was more optimistic: 2.8 percent. In April, Bloomberg reported the conclusions of different economic analysts: they ranged from a 0.5 percent fall in GDP to an increase of three percent.

As with inflation, the difference between projection and reality in the Gross Product item was also abysmal. Although in this case, for the better. This week the result of third quarter growth emerged: up 5.9 percent.  This brings the accumulated growth up until October to 6.4 percent and the current „consensus“ indicates a floor of 5.5 percent by the end of December.

On this topic, all forecasters erred substantially. 

Dollar and exports

The dollar or exchange rate is the other key variable that specialists monitor closely.

A year ago, the Central Bank’s REM forecast that in 2022 the currency would end up with an official wholesale value of 163.74 pesos per greenback. The official projection from the LatinFocus Consensus Forecast was 160.29 pesos.

Two Fridays ago, the wholesale dollar closed at 172.70 pesos and will likely be close to 175 pesos at the end of the month. In this case, the difference is not so extreme: less than 10 percent margin of error in both measurements.

In this case, the difference was not so extreme: less than 10 percent error in both measurements.

Regarding exports, a year ago the REM estimate was US$77 billion for the whole of 2022, which is the figure that was almost reached in October. The Foreign Ministry has just anticipated that by the end of the year a record high of US$100 billion will have been neared. If this were to materialise, the gap with the experts’ take would be more than 30 percent.

As a consolation for large international financial institutions and local experts, it could be said that the government’s forecasts failed too – the 2022 Budget prepared by ex-economy minister Martín Guzmán, which was never approved, envisaged inflation of 33 percent, GDP growth of four percent, a dollar at 131 pesos and exports of US$90 billion.

By far the biggest gap was inflation: almost three times the official target.

Accurate errors

Some attribute continuing errors in economic projections to ideological biases that interfere positively or negatively with consultants, who can be more optimistic in their projections with more orthodox administrations and more pessimistic with heterodox ones. There may be an ideological bias that accentuates errors, but I believe that in general economists are generally balanced enough to get it wrong.

This can be seen in this year’s results, whereby they mixed what ended up being positive (less inflation than real) with negative (less growth than real) erroneous projections. There were years during Kirchnerism in which the IMF was its most optimistic forecaster: for 2008 it predicted growth of almost double the 4.1 percent that occurred; and in 2012, the Fund projected a rise of more than four percent, as opposed to what ended up being a fall of one percent.

What I do believe is that there are those who give their opinions and make projections as if they were communicators of an exact science, and others who analyse economic variables with multidisciplinary tools and think about the future in terms of scenarios with different degrees of probability. The former are assertive and make forecasts with the accuracy of two or more decimal places. In their reasonable desperation to understand what is coming, because they are the preferred choice of businessmen who seek to find certainty where there is none. They are also the choice of journalistic programmes that only need to quantify their respective prejudices.

But on the eve of the election campaign, it is the politicians who today are most tempted by this type of exact economists. If society demands economic certainty, who better to provide it than the illusionists of macroeconomics. In any case, the responsibility lies with politicians who, through ignorance or demagogy, continue to propose perfect economic solutions, as if they had been tested in a physics laboratory.