What's the Consensus Call?

The evolution of consensus forecasts can often yield useful insights about the plight of the world economy. And the latest Blue Chip survey of economic forecasters, published earlier this week, is no exception. The latest January survey, for example, suggest that global growth prospects remain hostage to the COVID pandemic. But inflation concerns are also mounting in some countries and taking a toll on their growth outlook at the same time. Those inflation concerns are now mapping more into the interest rate outlook as well in some of those countries following recent hawkish communications from, for example, the US Fed and the Bank of England. The absence of any material inflationary pressures in Japan and China has been noteworthy, however, as has the relatively dovish response to recent events in Europe from the ECB. And the implications of all this for expected interest rate differentials between the US and most other major economies has had some predictable implications for consensus forecasts for the US dollar as well.

In what follows we briefly discuss some of these considerations with reference to a few exhibits.

Growth forecasts pared back in the US and Europe, lifted in China and Japan

We'll start with the outlook for economic growth. Consensus forecasts for GDP growth in most major economies for 2022 have been pared back in recent months (see figure 1 below). COVID considerations, inflation concerns and the policy response to both of these have been arguably to blame.

Figure 1: The evolution of consensus forecasts for GDP growth for 2022

This can be seen in broader detail in figure 2 below in which we have plotted the 3 month change in the GDP consensus for 2022 on the x-axis and compared this with the 1 month change in that consensus on the y-axis. Most of the negative momentum in growth expectations for this year is therefore illustrated in the south-west quadrant of the chart and seems to have specifically engulfed by large European countries. This region has been most affected in recent months by the COVID pandemic. Equally it has lately seen a burst of higher-than-expected inflation outcomes and ebbing consumer confidence at the same time. This contrasts with countries such as Japan, Taiwan and Australia in the north-east quadrant of the figure which – until the past month or so – had seen falling COVID case numbers, fewer restrictions and relatively benign inflation outcomes too.

Figure 2: 1 month and 3 month changes in consensus GDP forecasts for 2022

Source: Wolters Kluwer/Haver Analytics

Inflation concerns in the US and Europe

Some more detail of the divergence that now exists in the Blue Chip consensus for the inflation outlook in some of the major economies can be seen in figure 3 below. Positive inflation surprises – and upward revisions to inflation expectations – are evidenced in the US, the Euro Area as well as the UK. Far more benign inflation outcomes - and fairly stable inflation expectations - have been in evidence in Japan and China.

Figure 3: The evolution of consensus forecasts for CPI inflation for 2022

And this, in turn, has had mostly predictable implications for interest rate expectations not least now that some Central Banks – the US Fed and the Bank of England in particular – have responded to their respective inflation news with more hawkish policy communications (figure 4 below). An outlier here is the Euro Area where interest rate forecasts for this year have not really budged notwithstanding recent positive news on the inflation front. That in turn though can arguably be squared with the observations about the growth outlook that were made above. Euro area GDP forecasts have been derailed more by COVID matters of late, compared with the US. And partly for this reason too the ECB has yet to sound the alarm bells on inflation matters with the same degree of urgency as has the Fed.

Figure 4: The evolution of consensus forecasts for 3 month interest rates in 2022

In the meantime these cross-country and cross-regional perspectives have had mostly predictable implications for exchange rate expectations. Forecasts for the US dollar in particular have been lifted in recent months (see figure 5 below) as expected interest rate differentials between the US and many other major economies have widened.

Figure 5: The evolution of consensus forecasts for the US dollar in 12 months' time

The bottom line here is that forecasters are not – on the whole – painting a particularly upbeat macroeconomic picture about what lies ahead. The outlook is expected to be engulfed by soggier economic growth, still-high inflation, firming US interest rates and a firming US dollar. And we should further note that those last two factors are not typically a pleasant cocktail for emerging markets.

What will arguably matter most now, however, not least for financial markets outcomes, is how policymakers respond to still-high inflation. The debate has shifted of late in favour of those arguing that higher inflation will prove to be a more permanent feature of the landscape than many Central Banks had previously anticipated. Those arguing for a more transitory inflation phase, however, still have plenty of ammunition to sustain this debate. Evidence is mounting to suggest supply chain bottle necks are easing, for example. Wage pressures still seem to be fairly contained (relative to headline inflation) and broader gauges of inflation expectations have not yet been meaningfully dislodged.

All that said, our final exhibit in figure 6 below, still suggests Central Banks still have some work to do. A gauge of real economic activity in commodity markets – a useful proxy for the strength of global growth and inflationary pressures – still seems out of kilter with financial markets' interest rate expectations (as measured by the yield on 10 year US Treasuries). In simple terms that suggests monetary policy is still quite loose. How that gap is bridged will arguably hold the key to how financial markets and the broader world economy will evolve in the period ahead and how consensus forecasts might be challenged as a result.

Figure 6: US 10 year Treasury yields versus global activity in commodity markets

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.