At least when it comes to the big picture. But let’s not put all of the blame on professional seers. When it comes to economic or historical turning points, almost no one sees them coming.
“Economists tend to have too much hubris,” said Laura D’Andrea Tyson, who can be found on anyone’s short list of the nation’s most respected … economists. The former chair of the President’s Council of Economic Advisers during the Clinton Administration is now a professor of business administration and economics at the University of California, Berkeley. As someone who’s been called on repeatedly to divine the future for markets and world leaders, she’s all too aware of the chances for getting it wrong.
Think of the big events that nearly everyone missed: the fall of the Berlin Wall, the collapse of the Soviet empire, the rapid emergence of China as a global economic power after Tiananmen Square, the Arab Spring and, most recently, the sudden, violent appearance of ISIS in the Middle East.
There are ways to sharpen one’s foresight. One is the Good Judgment Project, an effort to harness the “wisdom of the crowd” to yield more accurate predictions. But individuals can learn to do a better job as well. Speaking at the 2014 Global Summit of Supply Chain Insights in Scottsdale, Ariz., Tyson said they should always be willing to assign a probability rating to any forecast they make, then continually adjust their assessment in line with subsequent developments.
In any case, don’t expect economists to nail exact numbers or events. “They are more able to forecast the direction of change than the timing or magnitude of change,” Tyson said. She cited Yale University professor Robert J. Shiller’s 2000 book Irrational Exuberance, which foresaw the housing market crash, but not the crushing recession that followed.
So, taking into account the inability of even the most distinguished economists to see around corners, where are we headed now?
The picture doesn’t look very rosy. The rate of economic recovery around the world is uneven at best. Western sanctions on Russia, in response to the crisis in Ukraine, are sure to impact the health of the European Union, which is already in a double-dip recession and confronting the prospect of deflation. Japan seems forever mired in economic stagnation. And growth in China, after decades of overheated performance, is finally slowing. Meanwhile, the World Trade Organization remains in a state of virtual paralysis, following the collapse of the Doha Round of trade-liberalization talks in 2008.
All that aside, globalization is far from being in retreat. It’s true that foreign direct investment flows – the building blocks of economic development – have dropped 41 percent since their 2007 peak. But cross-border trade continues to rise, with the flow of goods growing by 11 percent over the past decade and surpassing their 2007 peak in 2012. Today, said Tyson, some 35 percent of all goods cross national borders.
And the future? She sees a continued shift of power from Europe and the U.S. to the Asia-Pacific region, with China squarely at the center. Economic expansion in that country, as it shifts focus from promoting exports to fueling demand for domestic goods and services, will likely be in the 6- to 7-percent range, instead of the double digits seen over the last two decades.
The U.S., where growth has recently hovered around 2 percent, will inch toward 3 percent. At the same time, the Federal Reserve has issued clear signals that it intends to begin constricting the money supply and raising short-term interest rates in the near future. (That’s one prediction that some economists have been making for several years.)
In the area of monetary policy, said Tyson, “we’re on the verge of a major shift.” But don’t look to economists for a reliable number on future interest rates, which have remained stubbornly low despite ever-rising levels of government debt. That’s one area where their record of prognostication has been historically weak.
“We have had falling real interest rates for a very long time, and we’re not sure why,” Tyson said. At least she’s honest about it.
For Europe and Japan, she was much more pessimistic. Japan seems unable to achieve significant structural reform in key areas such as land use, services and regulations. Meanwhile, it continues to struggle with a high debt ratio and demographic issues arising from a steadily aging population.
Tyson is “very worried” about Europe, which has largely failed to extricate itself from recession and is suffering from deep economic disparity across the eurozone. Yet another interest-rate reduction is pushing the region toward deflation, with continuing volatility in financial markets.
Oil prices are always an economic wild card. Some believe the discovery of huge reserves of oil and natural gas in the U.S., obtainable mostly through fracking, will put a damper on energy prices. But Tyson cautioned that the level is set on global markets, and that U.S. oil independence won’t have that big of an impact on world prices.
The uneven recovery continues. Since the end of the Great Recession in 2009, the world economy has grown every year. Sparking the trend are emerging markets, whose economies have continued to outpace those of developed nations.
In the early 2000s, Tyson said, the U.S. economy accounted for between 60 and 70 percent of global growth. Now it’s down to 18 percent, with China accounting for 40 percent, and the rest of Asia another 50 percent. “If that isn’t a shift,” she said, “I don’t know what is.”
No economist will lose her job by predicting a continuation of these trends into the near future. What the experts consistently miss, however, are the radical shifts that seem to come out of nowhere – at least until we apply the gift of hindsight. So don’t expect even the most prestigious analyst to foresee the so-called Black Swans. Every day is a surprise.