The Lessons of 2016
As we are entering the finishing stretch towards the festive season, financial market activity and economic newsflow are likely to slow this coming week. Away from procuring last-minute presents for loved ones and posting belated holiday greetings to far away ones, these calmer days offer a good time to reflect on the year that is about to end and think about what the next year might bring. This reflection about the accuracy of our key calls and the major surprises we encountered form an essential part of the forecasting process, for we aim to constantly improve by learning from our mistakes, reviewing our priors and engaging in a robust debate with our colleagues and clients.
So, here is how our forecasts fared over the last 12 months and what this implies for 2017.
In our 2016 outlook, where we pegged global GDP growth at 3.3%Y, the MS macro team was too optimistic about growth. At about a quarter of a percent, the forecast miss was relatively small though and almost equally due to misses in DM and EM. Our inflation forecasts, by contrast, did less well, in particular in DM, where headline inflation, at 0.8%Y on average, ended up half as high as we projected in November 2015. Our EM teams did a much better job collectively, projecting headline inflation a touch below 4%Y. A considerable part of the inflation forecast error can be attributed to an unexpected fall in commodity prices in early 2016, which the oil futures we base our forecasts on did not reflect. But in some countries, e.g., Japan and the UK, we also had material misses on core inflation.
This post was published at Zero Hedge on Dec 19, 2016.
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