European Commission Winter 2013 Economic Forecast

This post was written by Seamus Coffey

The Commission have released their updated economic forecasts for 2013 and 2014.  With an estimated –0.6% contraction in 2012 the eurozone is forecast to contract by a further –0.3% in 2013.

Ireland is set to be the third fastest growing eurozone country with the 1.1% growth forecast behind only Estonia (3.0%) and Malta (1.5%).  This is not a reflection of any strong performance in Ireland’s case.  Inflation for the eurozone at 1.8% is “close to but below 2%” though.

The public balance for the eurozone is forecast to fall from -3.5% of GDP last year to –2.8% of GDP this year.  No eurozone country is expected to run a surplus and at –7.3% of GDP Ireland will have the largest public deficit in the eurozone (the UK at –7.4% of GDP is expected to have the largest deficit in the EU27).

All of the details are available from this page (though for the moment some of the numbers in the interactive map do not match those in the statistical annex).

11 Responses to “European Commission Winter 2013 Economic Forecast”

  1. seafóid Says:

    http://monthlyreview.org/2013/02/01/mr-064-09-2013-02

    For a long time now orthodox economics has been hindered by its extreme irrealism—a refusal even to attempt a realistic theoretical understanding of how modern capitalism functions. The shift to using fanciful assumptions to explore largely minor issues, following a brief Keynesian moment in the post-Second World War era, has been in many ways self-reinforcing. Once fundamental characteristics of the capitalist economy such as labor exploitation, accumulation, built-in inequality, monopoly power, rent-seeking behavior, technological change, and the tendency to stagnation were removed from the analysis—as a result of an ideological process of system-rationalization—there was little recourse but to fall back in successive stages on more and more abstract models based on increasingly purified notions of individual rationality.… Nevertheless, the deepening crisis of today’s monopoly-finance capital has given rise to a new era of questioning within the economics profession, and some top-tier neoclassical economists are now struggling—though hindered at every step by their own training and inclinations—to recapture knowledge long abandoned.

  2. David O'Donnell Says:

    “The weak demand in the employment-intensive economy coupled with some skills mismatches is expected to result in only slowly declining unemployment in the coming years. [Ireland …

    Large segment of a younger generation Exits; large section of an older generation sentenced for life to dole and state pension and its attendant economic, social and psychological ills.

    Why? ‘Abstract capital’ deemed more important than ‘human capital’ by our captured national and EU leaderships who deserve to be in shackles in The Hague.

  3. Gavin Kostick Says:

    @ Seamus Coffey

    Proper question for you. Why, since the start of the crisis, are the EU Commission’s forecasts so bad?

  4. grumpy Says:

    @Gavin

    Don’t know about Seamus, but there is a psychological element to it. Your audience and peers have on average, very conservative expectations. If you build a model or make a forecast that fits their view and expectations and are wrong, you are still one of the group - and no wronger than most.

    If you make a forecast that contradicts their accepted view, then you are a smart-arse loose cannon who will attract resentment if you are right. Your correctness is a threat to the gravitas of the group. If you are wrong, you have challenged the group and made an idiot of yourself.

    Its a bit like “Nobody ever got sacked for buying [insert large household name here]”

    BTW isn’t it about time you updated the thespian, back of the envelope forecasts, based on the premise that official forecasts are predictably over-optimistic?

  5. grumpy Says:

    @Gavin

    Take a look at the BOEs record here:

    http://ftalphaville.ft.com/files/2013/02/BoE-Nomura-Feb-20.png

    from:

    http://ftalphaville.ft.com/2013/02/20/1393242/a-minutes-worth-of-sterling-freefall/

    Follow the red line. Every time there is a black line diverging from it, that is a BOE forecast. The red line is actual inflation.

    Can you spot a pattern?

  6. Bryan G Says:

    One solution would be to tie a forecaster’s salary/compensation to the accuracy of their forecasts. Right now there appear to be no negative consequences, of either a reputational or financial nature, for always being wrong year after year.

    I imagine this taste of real capitalism would not be received very well in the hallowed halls of the EU Commission, ESRI or whatever. If you start aligning incentives with accuracy and honesty who knows where that could end up?

  7. Seamus Coffey Says:

    @ Gavin,

    I don’t put much mass on any individual predictions. The way this piece was put together probably over-eggs what I said:

    http://corkindependent.com/20121206/business/predicting-the-future-S55187.html

    Have the EC forecasts been noticeably worse than other official forecasts? I think the pattern of almost all forecast is pretty clear. Predict that things will be better in 18 months time. Repeat every six months.

  8. Gavin Kostick Says:

    @ grumpy, Seamus, et al

    “BTW isn’t it about time you updated the thespian, back of the envelope forecasts, based on the premise that official forecasts are predictably over-optimistic?”

    I’ll give that a go.

    This came from a discussion from July 2011, where you cited an paper which offered, in effect, an average ‘optimism filter’ for economic predictions being made by governments.

    I used that on Department of Finance figures at the time.

    In June 2011 the DoF predicted growth (GDP) of:
    2011 : 0.75%
    2012 : 2.5%
    2013 : 3%

    I applied the ‘optimism tendency’ (see ft link) adjuster and got:
    2011 : 0.55%
    2012 : 1.7%
    2013 : 1.5%

    According to the latest EU Commission Winter 2013 figures we now have:
    2011 : 1.4%
    2012 : 0.7%
    2013 : 1.1% (predicted)

    Looking to the future, we can start again with the Department of Finance’s forecast as of the Budget, December 2012:
    2013 : 1.5% (predicted)
    2014 : 2.5%
    2015 : 2.9%

    Apply optimism filter and the envelope says:
    2013 : 1.3%
    2014 : 1.7%
    2015 : 1.4%

    So, to be fair, 2011-2013, the envelope only won 2-1 with the DoF being more accurate in 2011. But the envelope was beautifully spot on with seeing the DoF growth prediction come down to the exact same by 2013. And I think it would be fair to say that the envelope got the trend more accurately than the DoF.

    I have have more thoughts on this, but I don’t want to muddy the envelope now, and will let the above stand so we can see how this plays out.

    http://ftalphaville.ft.com/2011/07/25/633496/what-the-united-states-could-learn-from-chile/?

    http://www.irisheconomy.ie/index.php/2011/07/25/going-going-still-here/

  9. grumpy Says:

    @Gavin

    I think a Nobel prize is on the cards there - the unlitimate triumph of Fagpackonometrics.

  10. Shay Begorrah Says:

    @Seamus Coffee

    Have the EC forecasts been noticeably worse than other official forecasts?

    That seems a little easy on the neoliberal boffins in the various EU institutions and their German sponsors, surely when you get to set the terms of Eurozone economic policy you should be expected to get better results than even a very good playwright using his best envelope? (though “Results based tender wins Fishamble contract for Eurozone forecasting” is a headline I would like to see).

    Obviously the suspicion has to be the models were worked over until they were compatible with the desired results and the desired results were ones which made the current policy set look beneficial.

    We must have IMF vs EC predictions for economic performance in the years since the start of the global financial crisis, right?

  11. Gavin Kostick Says:

    “Have the EC forecasts been noticeably worse than other official forecasts?”

    A few weeks back you posted:

    ‘The accuracy of the European Commission’s forecasts re-examined’

    Which report contained the remarkable sentence:

    “An assessment of t+2 forecasts which are added each autumn has not
    been carried out to date, but could be envisaged for the future.”

    So, I had a brief look at a sample and came up with the EU being 2.88% out (too high).

    Now, grumpy’s average over-optimiser suggests that governments are on average over-optimistic by 1.5% when looking two years ahead. The Commission, in this case, was almost double that. So, yes, I do think that on the face of it it is worth looking at whether Commission forecasts are notably worse.

    http://www.irisheconomy.ie/index.php/2013/01/10/the-accuracy-of-the-european-commissions-forecasts-re-examined/

    This, and the use of GDP, matters as these are used in the MoU and in looking at debt stabilization and are used to input into budgetary policy.

    Of course one could say that 2010 is an unfair snap-shot to choose as ‘nobody’ was right at that point (except those that were of course).

    It is interesting to note that Rehn, in his recent letter, started to shift a bit to, well we all know austerity would be contractionary, mode.

    If we all knew that, why were the Commission figures so off? Or more accurately, why were the warnings with the figures not given that austerity would destroy growth at this stage. Why, in 2010, was Rehn saying:

    “As for the developed world, the European Union has recently revised its economic forecasts upward, as growth has revived and the job situation has slowly started to improve. Meanwhile, economic forecasts for the United States have been downgraded owing to flagging growth during the second half of 2010. A combination of high employment, which is widely threatening to become structural, and continued gloom on the housing market does not hold out the promise of any rapid spurt of growth for the U.S. economy.”?

    It seems to me that when Rehn & Co., talk about confidence, they are mainly talking about confidence in investors in sovereign debt. They thought originally that confidence was going to come by governments cutting deficits. But the markets always want two things simultaneously: government deficits to be in control and economic growth - see Moody’s rationale for downgrading the UK. It would have been better to have made a clear map that goes growth first, deficit naturally reducing second, as the US has approximately managed.

    As de Grauwe has recently noted, confidence in this area in the EZ really came back when the ECB announced OMT (look how I’m chucking the TLA about). A decent lender of last resort was something Ireland and other states was looking for from the start of the crisis.

    One suspects that the ‘optimistic’ growth forecasts are consciously or unconsciously informed by the idea that people and companies will start to spend a bit more if they think growth is coming. But the repeated downgrading of growth forecasts as jam tomorrow becomes no-jam today is shredding confidence, which is one reason why I think that it is not only (being generous) a technical problem but a bad strategy.

    An unconnected point. I think in the case of the DoF it is not necessarily that they are ‘over-optimistic’ but that whatever model they are using underestimates the volatility of the Irish economy. They underestimated the boom and the bust. If they carry on like this there may come a time when they underestimate growth again.

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