European Central Bank President Christine Lagarde added her voice to critics of experts' forecasts (French)

Economists are facing criticism after they made incorrect estimates related to inflation, failed to anticipate the disruptions witnessed in supply chains, while predicting a recession that did not appear.

Experts found it difficult to predict developments in economic conditions in light of the (Covid-19) epidemic, the war in Ukraine, and, most recently, the conflict in the Middle East, according to a report reported by Agence France-Presse.

A tribal group

European Central Bank President Christine Lagarde added her voice to the critical voices of economists during the World Economic Forum in Davos last January.

“Many economists are actually a tribal group,” she said, referring to the lack of openness to other scientific trends.

Lagarde - who in the past held the positions of Director of the International Monetary Fund and French Minister of Finance - added that experts "quote each other's sayings... They do not go beyond the boundaries of their world, because they feel comfortable in it."

Some economists are already stressing that their peers need to break out of their comfort zone of traditional spreadsheets and rigid models.

The agency quoted the chief eurozone economist at ING Bank, Peter Vanden Hout, as saying - in a sarcastic tone - that the world has “changed somewhat.”

Inflation

After years of low inflation, the reopening of the world's economies led to higher prices, which increased further after the Ukraine war, proving the inaccuracy of the reassurances of Lagarde and the head of the US Federal Reserve, Jerome Powell, that the increases would be only "transient."

Central banks have been forced to raise interest rates several times to combat inflation, and while price increases have eased in recent months, policymakers have kept rates high while waiting to determine whether they can lower them later this year.

Lagarde acknowledged that the expectations on which the European Central Bank's decisions were based were not always correct, and its models did not take crisis-related factors into account.

“The models we currently use are less reliable, given that there are many factors that are difficult to integrate,” Vanden Hout said, pointing to the disruption of supply chains after the pandemic, labor shortages and geopolitical tensions.

He added that economists were wrong to return to the perspective of the past.

"The source of failure is not economic models, but economists' lack of imagination," Allianz Trade economist Maxime Darmet said.

He added, "They settled on their past glories after 30 years of globalization during which everything went well."

A recession did not happen

While central banks resorted to raising interest rates to prevent economies from getting out of control, experts warned that growth in developed countries would record a sharp decline or contraction in 2023.

But what happened was that the United States economy recorded growth last year, while the Eurozone economy, with the exception of Germany, remained within the growth zone.

Earlier this week, the International Monetary Fund raised its global growth forecast for 2024 to 3.1%, attributing the matter to the unexpected resilience in major emerging and advanced economies, including the United States and China.

The agency quoted economics professor at Princeton University, Alan Blinder, as saying, “There is a puzzle in this apparent slowdown in inflation.”

There were all indicators indicating a future recession, especially interest rates in the United States, while pessimism dominated the indicators, knowing that in the 1970s, recession was the only way out of high inflation, but economists were again accused of narrow-mindedness.

Vanden Hout attributed the matter in part to poor data quality and low response rates to surveys.

New phenomena also contributed to the matter. For example, savings helped increase consumption, while companies dealt “better” with interest rates than was the case in the past, according to the agency, quoting the general director of Market Securities Monaco, Christophe Barrot. .

New faces

Nobel Prize winner in Economics, Esther Duflo, recently stated in an interview with Agence France-Presse that economists have fallen to “last place” on the list of the most trustworthy professions, surpassing even meteorologists.

This led to attempts at change. Last July, the Bank of England appointed former Chairman of the US Federal Reserve, Ben Bernanke, to lead a review of the progress of the bank’s forecasting operations after it faced criticism for its failure to anticipate high inflation.

For its part, the Bank of Canada decided to replace its old models with more forward-looking methodologies.

“Everyone knows that current models are no longer acceptable for making good predictions,” Vanden Hout said. “We need to think differently, or at least expand the models by incorporating other elements.”

Source: French