It would be an understatement to say that economic forecasts are a constant disappointment to investors. The trouble arises because the forecasters’ models are fundamentally flawed.
Many are over-reliant on extrapolations of the recent past, while the so-called New Keynesian models deployed by professional economists rarely pick up big economic shifts, such as the 1970s oil shock or the rapid rise of China.
Such shifts are inherently unpredictable. Yet there are some fundamental regime changes that ought to be predictable and which forecasters may now be overlooking. The most obvious, which will be hugely important for capital markets, relates to demography and the impending shrinkage of the global workforce.
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