High-frequency credit spread information and macroeconomic forecast revision

We examine whether professional forecasters incorporate high-frequency information about credit conditions when revising their economic forecasts. Using a mixed data sampling regression approach, we find that daily credit spreads have significant predictive ability for monthly forecast revisions of output growth, at both the aggregate and individual forecast levels. The relationships are shown to be notably strong during ‘bad’ economic conditions, which suggests that forecasters anticipate more pronounced effects of credit tightening during economic downturns, indicating an amplification effect of financial developments on macroeconomic aggregates. The forecasts do not incorporate all financial information received in equal measures, implying the presence of information rigidities in the incorporation of credit spread information.     

How quickly do forecasters incorporate news? Evidence from cross‐country surveys

Using forecasts from Consensus Economics Inc., we provide evidence on the efficiency of real GDP growth forecasts by testing whether forecast revisions are uncorrelated. As the forecast data used are multi‐dimensional—18 countries, 24 monthly forecasts for the current and the following year and 16 target years—the panel estimation takes into account the complex structure of the variance–covariance matrix due to propagation of shocks across countries and economic linkages among them. Efficiency is rejected for all 18 countries: forecast revisions show a high degree of serial correlation. We then develop a framework for characterizing the nature of the inefficiency in forecasts. For a smaller set of countries, the G‐7, we estimate a VAR model on forecast revisions. The degree of inefficiency, as manifested in the serial correlation of forecast revisions, tends to be smaller in forecasts of the USA than in forecasts for European countries. Our framework also shows that one of the sources of the inefficiency in a country's forecasts is resistance to utilizing foreign news. Thus the quality of forecasts for many of these countries can be significantly improved if forecasters pay more attention to news originating from outside their respective countries. This is particularly the case for Canadian and French forecasts, which would gain by paying greater attention than they do to news from the USA and Germany, respectively. Copyright © 2006 John Wiley & Sons, Ltd.     

Medium term growth forecasts: Experts vs. simple models

We compare the medium-term GDP growth forecasts generated by experts to those generated by simple models. This study analyzes a large set of forecasts that covers 48 countries from 1997 to 2016. Out-of-sample exercises indicate that no noticeable difference in performance is observed for advanced economies. In contrast, in the case of emerging economies, model forecasts perform better than expert forecasts. In addition, similar patterns are found for a collection of forecasts from a different set of experts, which suggests that the reported regularity is prevalent. Further analyses suggest that the documented difference in performance can be explained by an optimism bias, excessive reactions to innovations in growth trajectories, and insufficient responses to the information contained in the current account balance.     

World Economic Prospects

Overview: Dollar surge brings mixed consequences

• The strengthening dollar is now becoming a significant factor for global growth and our forecasts. The tradeweighted dollar is up 2.5% over the last month and over 12% on a year ago.
• Driving the latest rise are growing expectations of US rate hikes while monetary policy in many other major economies is headed in the opposite direction.
• The beginning of ECB QE has prompted a further slide in bond yields and the euro – which at 1.06/US$ is on course to fulfill our forecast of near‐parity by year‐end. Weak data in Japan also raises the chance of a further expansion of QE there later this year.
• We remain relatively positive about the advanced economies: we forecast G7 GDP growth at 2.2% for 2015 and 2.3% next. This month we have revised up German growth for 2015 to 2.4% – a four‐year high.
• Robust US growth and a strong dollar are good news for the advanced economies. US import volume growth firmed to over 5% on the year in January, while the dollar surge potentially boosts the share of other advanced countries in this growing market.
• But for the emerging economies the picture is mixed. A stronger US may boost exports, but rising US rates are pulling capital away: there has been a slump in portfolio inflows into emergers in recent months. Emerging growth may also suffer from higher costs of dollar funding and a rising burden of dollar debt as currencies soften – the more so if US rates rise faster than markets expect.
• Moreover, emergers are also under pressure from a slowing China. Chinese import growth has been weak of late and commodity prices remain under downward pressure. A notable casualty has been Brazil, which we have downgraded again this month – GDP is expected to slump 1.1% this year.
• Emerging GDP growth overall is expected to slip to 3.7% this year, the lowest since 2009. And excluding China, emerging growth will be only 2.2% – the same as the G7 and the worst performance relative to the advanced economies since 1999.

     

World trade: Modest recovery continues

The latest indicators suggest a modest recovery in world trade. The apparent upswing in US import demand over the last couple of months is a notable positive signal for the global economy, and the constraining impact on world trade of the Eurozone recession of 2011–13 is also easing. The pace of world trade growth is, however, still relatively slow; our forecasts suggest world trade growth will only recover to its long‐term average level of just under 6% per year by end‐2015. Trade growth in key emerging markets also remains soft, although some indicators from Asia suggest an improving picture. One reason for the relatively weak growth in world trade may be a restructuring of global supply chains, reducing the growth in trade in intermediate goods. If so, this is not necessarily bad news for the global economy but may have distributional consequences, for example bearing down on growth in countries that have specialised in providing such goods including some emergers.     

Forecasting and forecast narratives: The Bank of England Inflation Reports

We analyze the narratives that accompany the numerical forecasts in the Bank of England’s Quarterly Inflation Reports, 1997–2018. We focus on whether the narratives contain useful information about the future course of key macro variables over and above the point predictions, in terms of whether the narratives can be used to enhance the accuracy of the numerical forecasts. We also consider whether the narratives are able to predict future changes in the numerical forecasts. We find that a measure of sentiment derived from the narratives can predict the errors in the numerical forecasts of output growth, but not of inflation. We find no evidence that past changes in sentiment predict subsequent changes in the point forecasts of output growth or of inflation, but do find that the adjustments to the numerical output growth forecasts have a systematic element.     

World Economic Prospects

Overview: Oil price slump boosts growth forecasts

• Oil prices have fallen further over the past month, with Brent dropping below US$50 per barrel. Prices are now down over 50% from their June 2014 peak levels. We do not expect any significant supply response (either from Saudi Arabia or US shale producers) to come through until late this year so low prices will persist for some time.
• This is a positive development for world growth, though the impact will be uneven across countries. Based on our new oil price forecast of US$55/barrel for 2015, we estimate that the oil bill for ten leading industrial economies, (accounting for over 60% of world GDP) will be US$440 billion lower than it would have been based on our June 2014 oil forecasts.
• This is around 1% of their combined GDP, money potentially free to be spent on other goods and services, including those of their main trading partners.
• US consumer sentiment already shows signs of reacting positively and with other US consumer fundamentals also improving we have upgraded our 2015 GDP growth forecast to 3.3% from 3% last month.
• We have also upgraded our forecasts for other advanced economies such as the Eurozone and Japan, where lower prices should be a flip to hardpressed consumers in particular.
• For the emerging markets, the slide in oil has starkly different consequences for different countries. Oil producers will be losers, most strikingly Russia where we now see GDP down over 6% this year – with financial instability exacerbating the oil effect. But China and India should both gain.
• Lower oil prices will also ease the external pressures some emergers have felt in recent months – reducing the risk of further hikes in domestic interest rates resulting from inflation and currency pressures.
• We now see world growth at 2.9% in 2015, up a tenth from last month and an increase from 2.6% growth last year. This is our first upgrade to the global growth forecast since August 2014.

     

Do IMF forecasts respect Okun’s law? Evidence for advanced and developing economies

This paper provides an assessment of the IMF’s unemployment forecasts, which have not received much scrutiny to date. The focus is on the internal consistency of the IMF’s growth and unemployment forecasts, and specifically on seeing whether the relationship between the two is consistent with the relationship in the data, i.e., with Okun’s Law. We find that the average performance is good, in the sense that the relationship between growth and unemployment forecasts is fairly comparable to that which prevails in the data: on average, the Okun coefficient in the forecasts mirrors the Okun coefficient in the data. Nevertheless, there is room for improvement, particularly in the year-ahead forecasts and for the group of middle-income countries. We show that a linear combination of Okun-based unemployment forecasts and WEO unemployment forecasts can deliver significant gains in forecast accuracy for developing economies.     

Bilateral M&A activity from the Global South

This paper studies the factors associated with outbound bilateral mergers and acquisitions (M&A) activity by firms located in emerging economies. We document recent trends in emerging market M&A flows, which have risen dramatically over the past decade, and explore the factors that may have contributed to this rise. We find distinct patterns for M&A deals according to whether the acquisition targets are in other emerging economies or advanced countries, and that these differences can be attributed to differing theoretical motivations behind foreign direct investment. We also consider the implications of our model for future M&A originating in the Global South, in light of the global financial crisis of 2008.     

Do Investors Pay Sufficient Attention to Banks’ Unrealized Gains and Losses on Available-for-sale Securities?

Abstract

Unrealized gains and losses on available-for-sale securities (AFSGL) are included in Other Comprehensive Income (OCI) and directly affect shareholders’ equity but are not included in earnings. We investigate whether unrealized AFSGL help predict future earnings and whether analysts and investors incorporate the information conveyed by unrealized AFSGL in a timely manner. We conduct our investigation on a sample of banks because unrealized AFSGL are material in the banking industry. First, we show that unrealized AFSGL are material and help in predicting next period realized AFSGL and future earnings change. Second, we document that financial analysts are slow to react to unrealized AFSGL and update their forecasts after AFSGL are realized in earnings. Third, we find that investors are also slow to react to unrealized AFSGL and do so only after AFSGL are included (realized) in earnings and after financial analysts update their forecasts. We document an annual difference of 5% in future abnormal returns between banks in the top and bottom quintiles of past unrealized AFSGL. A zero-cost trading strategy that relies on public information about unrealized AFSGL generates a sizeable monthly alpha that ranges between 1.8% and 1.9%.     

Tracking world trade and GDP in real time

This paper proposes a simple procedure for obtaining monthly assessments of short-run perspectives for quarterly world GDP and trade. It combines high-frequency information from emerging and advanced countries so as to explain quarterly national accounts variables through bridge models. The union of all bridge equations leads to our world bridge model (WBM). The WBM approach of this paper is new for two reasons: its equations combine traditional short-run bridging with theoretical level-relationships, and it is the first time that forecasts of world GDP and trade have been computed for both advanced and emerging countries on the basis of a real-time database of approximately 7000 time series. Although the performances of the equations that are searched automatically should be taken as a lower bound, our results show that the forecasting ability of the WBM is superior to the benchmark. Finally, our results confirm that the use of revised data leads to models’ forecasting performances being overstated significantly.     

Professional forecasters and real-time forecasting with a DSGE model

This paper analyses the real-time forecasting performance of the New Keynesian DSGE model of Galí, Smets and Wouters (2012), estimated on euro area data. It investigates the extent to which the inclusion of forecasts of inflation, GDP growth and unemployment by professional forecasters improve the forecasting performance. We consider two approaches for conditioning on such information. Under the “noise” approach, the mean professional forecasts are assumed to be noisy indicators of the rational expectations forecasts implied by the DSGE model. Under the “news” approach, it is assumed that the forecasts reveal the presence of expected future structural shocks in line with those estimated in the past. The forecasts of the DSGE model are compared with those from a Bayesian VAR model, an AR(1) model, a sample mean and a random walk.     

World trade recovering but still reasons for caution

• ? World trade has picked up in recent months, expanding at the fastest pace in six years in the first quarter, with the rise fairly evenly split between advanced and emerging markets. Stronger activity in China and a broader upturn in global investment have been key factors. But there are still reasons for caution. Although the ‘cyclical’ element in world trade is improving, the ‘trend’ element is not thanks to changes in supply chains and a lack of trade liberalisation.
• ? World trade growth looks set to reach about a 4% annual rate in Q1 2017, the fastest pace since 2011. Alternative freight‐based indicators confirm the upturn. This suggests some modest near‐term upside risk to our world growth forecasts.
• ? Recent growth has been evenly split between advanced countries and emerging markets (EM). In EM, the end of deep recessions in Russia and Brazil and an upturn in China have been key factors. China directly added 0.5 percentage points to annual world trade growth over recent months and firmer growth there has also pushed up commodity prices and the spending power and imports of commodity exporters.
• ? Another important positive factor is an improvement in investment, which is a trade‐intensive element of world GDP. Rising capital goods imports across a range of countries suggest the drag on world trade from weak investment is fading.
• ? The decline in the ratio of world trade growth to world GDP growth over recent years has both cyclical and structural elements. But while the cyclical component now seems to be improving, there is little evidence that the structural part – responsible for between a half and two‐thirds of the recent decline – is doing likewise.
• ? Key factors behind the structural decline in world trade growth are changes in supply chains and a lack of trade liberalisation/protectionism. Both are likely to remain a drag over the coming years. Meanwhile, a levelling‐off of growth in China and drop back in commodity prices could curb the recent cyclical uptick.

     

Do aircraft perquisites cause CEOs to withhold bad news?

This paper explores the relation between management forecasts and expensive perquisites. We investigate Yermack's (2006) conjecture that managers withhold bad news in order to receive expensive perquisites. We provide direct evidence supporting Yermack's (2006) conjecture. The frequency and magnitude of bad news release is greater than that of good news after the chief executive officer (CEO) first discloses aircraft perks. In addition, managers with greater numbers of disclosed perks are more inclined to withhold bad news. Additional subsample analyses provide further support for managerial bad news withholding behavior.     

Evaluating the conditionality of judgmental forecasts

We propose a framework for evaluating the conditionality of forecasts. The crux of our framework is the observation that a forecast is conditional if revisions to the conditioning factor are incorporated faithfully into the remainder of the forecast. We consider whether the Greenbook, Blue Chip survey and Survey of Professional Forecasters exhibit systematic biases in the manner in which they incorporate interest rate projections into the forecasts of other macroeconomic variables. We do not find strong evidence of systematic biases in the three economic forecasts that we consider, as the interest rate projections in these forecasts appear to be incorporated efficiently into the forecasts of other economic variables.     

Does judgment improve macroeconomic density forecasts?

This paper presents empirical evidence on how judgmental adjustments affect the accuracy of macroeconomic density forecasts. Judgment is defined as the difference between professional forecasters’ densities and the forecast densities from statistical models. Using entropic tilting, we evaluate whether judgments about the mean, variance and skew improve the accuracy of density forecasts for UK output growth and inflation. We find that not all judgmental adjustments help. Judgments about point forecasts tend to improve density forecast accuracy at short horizons and at times of heightened macroeconomic uncertainty. Judgments about the variance hinder at short horizons, but can improve tail risk forecasts at longer horizons. Judgments about skew in general take value away, with gains seen only for longer horizon output growth forecasts when statistical models took longer to learn that downside risks had reduced with the end of the Great Recession. Overall, density forecasts from statistical models prove hard to beat.     

Forecasting economic and financial variables with global VARs

This paper considers the problem of forecasting economic and financial variables across a large number of countries in the global economy. To this end a global vector autoregressive (GVAR) model, previously estimated by Dees, di Mauro, Pesaran, and Smith (2007) and Dees, Holly, Pesaran, and Smith (2007) over the period 1979Q1–2003Q4, is used to generate out-of-sample forecasts one and four quarters ahead for real output, inflation, real equity prices, exchange rates and interest rates over the period 2004Q1–2005Q4. Forecasts are obtained for 134 variables from 26 regions, which are made up of 33 countries and cover about 90% of the world output. The forecasts are compared to typical benchmarks: univariate autoregressive and random walk models. Building on the forecast combination literature, the effects of model and estimation uncertainty on forecast outcomes are examined by pooling forecasts obtained from different GVAR models estimated over alternative sample periods. Given the size of the modelling problem, and the heterogeneity of the economies considered–industrialised, emerging, and less developed countries–as well as the very real likelihood of possibly multiple structural breaks, averaging forecasts across both models and windows makes a significant difference. Indeed, the double-averaged GVAR forecasts perform better than the benchmark competitors, especially for output, inflation and real equity prices.     

World Economic Prospects

Overview: Emerging sell‐off to restrain global growth

• Emerging financial markets have come under renewed downward pressure since mid‐January, with evidence of a general retreat by investors.
• There have been significant currency depreciations in several countries, and interest rates have been forced up in Turkey, India, South Africa and Brazil – with further hikes likely. Emerging stocks have plunged.
• This has prompted a sequence of downgrades to our growth forecasts for the emergers. We now expect Indian growth to be 0.2% lower this year than previously, South African growth 0.6% lower and Turkish growth 1.3% lower. In China and Brazil, growth in 2015 has been cut by around 0.5%.
• Weaker emerging growth will also constrain activity in the advanced economies. Emerging markets account for a modest share of advanced economy exports, but their share in export growth is higher. For the Eurozone, heavily dependent on external demand, this share has been 30–40% since 2010.
• Meanwhile, European listed firms get almost 25% of their revenues from emergers, and US firms 15% (while exports to emergers are 10% and 5% of GDP respectively). There has also been a sharp rise in bank loans to emergers in recent years.
• The biggest risks for global growth relate to China, which dwarfs the other emergers, and where concerns about possible financial instability, especially linked to shadow banking, have risen this year.
• Thanks to robust growth in the US, Japan and the UK, we still expect global growth to pick up in 2014, but downside risks have risen over the past month. With the US Fed set to press on with ‘tapering’ asset purchases, driving up global long‐term interest rates, emergers face potential further pressures.
• US tapering will be only partially offset by more expansionary monetary policy in Japan. What could make a big difference, and reduce the downside risks from emerging weakness, would be aggressive expansion in the Eurozone. At present, however, this seems unlikely – despite lingering deflation risks.

     

Does age structure forecast economic growth?

Increases in the proportion of the working age population can yield a “demographic dividend” that enhances the rate of economic growth. We estimate the parameters of an economic growth model using a cross section of countries over the period 1960 to 1980, and investigate whether the inclusion of age structure improves the model's forecasts for the period 1980 to 2000. We find that including the age structure improves the forecast, although there is evidence of parameter instability between periods with an unexplained growth slowdown in the second period. We use the model to generate growth forecasts for the period 2000 to 2020.     

Forecast Pooling for European Macroeconomic Variables*

We compare alternative forecast pooling methods and 58 forecasts from linear, time‐varying and non‐linear models, using a very large dataset of about 500 macroeconomic variables for the countries in the European Monetary Union. On average, combination methods work well but single non‐linear models can outperform them for several series. The performance of pooled forecasts, and of non‐linear models, improves when focusing on a subset of unstable series, but the gains are minor. Finally, on average over the EMU countries, the pooled forecasts behave well for industrial production growth, unemployment and inflation, but they are often beaten by non‐linear models for each country and variable.