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Special Surveys 1) Factors Affecting
Exchange Rates FACTORS AFFECTING EXCHANGE RATES In our March 2008 special survey of factors affecting exchange rates, we asked our panellists to rank the current importance of a range of different factors or economic indicators in determining exchange rate movements (against the US dollar, unless otherwise noted). Scores were assigned to each of the factors shown in the table below on a scale of 0 (no influence) to 10 (very strong influence). The consensus results are the averages of individual panellists' scores for each factor or economic indicator. Given that different currencies are influenced by a wide range of factors, we limited those considered to a common list of six (relative growth, inflation differential, trade/current account balance, short- and long-term interest rate differentials and equity flows, which we asked our panels to assess for every currency. In addition, we asked panellists to suggest, and rank, other factors or economic indicators which they felt to be of particular importance in determining exchange rate movements. The most frequently cited of these for each currency appear in the right-hand column of the table below, with the exception of a few currencies for which two main factors or economic indicators were equally frequently cited.
*Analysis refers to determinants of the exchange rate against the euro Exchange rates are clearly influenced by a wide range of different factors, and the importance of each varies both from country to country and, for any given currency, over time. This special survey is an attempt to compare and rank the differing degrees of sensitivity with which different currencies respond to these various influences. In addition, as these influences are frequently pushing in different directions, it should also help to determine which factors are likely to dominate. In addition to the six main factors ranked at our request by panellists (relative growth, inflation differentials, the trade or current account balance, short- and long-term interest rate differentials and equity market flows), we also asked for suggestions of other factors affecting exchange rates. The far right column in the table above shows only the most often cited or highly ranked, with the exception of a few currencies for which two main factors were both frequently cited. Nominal interest rate differentials remain the most powerful of the six main factors ranked for most OECD industrialised country currencies, while trade and current account positions play an important medium-term role for emerging market currencies. Inflation expectations and equity flows have also become more closely watched by investors, as risk aversion has intensified. Among the ‘other factors’ affecting exchange rates, ‘market volatility’ or ‘risk aversion’ has been cited as important for numerous currencies, reflecting uncertainty about the global outlook and today's reduced appetite for risk. Unlike the previous boom period, when low interest rates encouraged credit and investment into high-yielding assets, the turn in the business cycle has led to a liquidation of carry trade positions. ‘Commodity prices’ have also been ranked highly, as their rapid advance has contributed to a surge in export values and an improvement in the terms of trade. Source: Foreign
Exchange Consensus Forecasts, March 2008. TRENDS IN PRODUCTIVITY AND WAGES In our February 2008 special survey of trends in productivity and wages, we asked our panellists' projections for growth in numbers of employees and wage or employment costs between now and 2020, along with consensus forecasts for real and nominal GDP growth over the same period. Using indices derived from these projections, we have calculated forecasts for broad measures of productivity growth (real and nominal GDP per employee) and an indicator of unit wage costs (calculated by dividing the employment cost indices by the indices of real GDP per employee). Although some of the wage definitions used are imperfect measures for total compensation per employee, our calculated indices do provide us with a general indication of future trends in unit wage costs.
The slowdown in US economic growth in the fourth quarter of 2007 coincided with a moderation in productivity during the same period. Non-farm business productivity - measured by the Bureau of Labor Statistics as output per hour of all persons - eased from a substantial 6.0% (q-o-q annualized) gain in Q3 to 1.8%. Unit labor costs, meanwhile, rebounded from a 1.6% annualized decline in the previous quarter to jump by 2.1%. According to Consensus Forecasts' own calculations of productivity - defined as real output (GDP) per employee - 2007 as a whole was relatively modest due in part to higher unit wage costs. Going into this year, productivity is forecast to pick up, albeit minutely, reflecting cyclical factors such as the downturn in GDP growth expectations. In addition, some observers have suggested that the significant productivity gains of the 1990s - the result of strong IT advancement and capital spending which, in turn, lowered input costs and raised the trend of GDP growth - could be on the wane. Indeed, US estimates of output per worker were noticeably lower in 2006 compared with those for Japan or Germany. Looking ahead, though, US productivity rates are expected to recover the initiative. Japanese output per worker could falter in 2010 partly as the result of a widely-expected consumption tax hike which would hit consumers and businesses alike. Growth in unit wage costs for the UK, meanwhile, is projected to be the strongest among all the G-7 countries surveyed, as average wages are seen increasing by around 4%. In Germany, following years of corporate restructuring which saw unit wage costs fall noticeably, higher salary growth beginning in 2008 is expected to keep productivity growth between 1-1.5%. For further information, including economic data
on other countries, see the complete study in Consensus
Forecasts, February 2008.
In our January 2008 special survey of forecast probabilities, in addition to their central (most likely) forecasts in the consensus economic survey, we asked our panellists to assess the probabilities of a range of alternative outcomes for each of the listed variables, i.e. GDP forecasts, consumer price inflation forecasts and the current account balance in 2008, as well as for exchange rate forecasts (for the euro, the Japanese yen, the UK pound and the Canadian dollar) against the US dollar by the end of January 2008. This analysis is an attempt to quantify the risk that these economic indicators might turn out to be significantly higher or lower than individual forecasts currently suggest, and allows us to compile consensus probability distributions to identify those areas of greatest uncertainty in the economic outlook for the G-7 industrialized countries.
This special survey coincides with concerns over the US downturn. The uncertainty follows stock market turmoil in August and September 2007 after the housing sevtor was hit by the collapse in subprime lending. Although it originated in the US, the contagion spread across the globe as major financial institutions were exposed to re-packaged subprime debt. The prevailing market uncertainty imposed further downward pressure on the US currency and corresponding appreciations in the euro, UK pound, Canadian dollar and Japanese yen. Our respondents predict a 36% likelihood of the yen continuing to appreciate significantly against the US dollar versus a 22% probability of depreciation; many also assign a marginally higher probability of the C$ gaining strength as well.
For further information, including economic data
on other countries, see the complete study in Consensus
Forecasts, January 2008. Consensus Economics also undertakes special surveys for Long-Term Forecasts, Quarterly Forecasts, Sectoral Growth and FDI, Trade and Current Account Balances, Productivity and Wages, Economic Policy Evaluation, Factors Affecting Exchange Rates, Forecast Probabilities and many other economic-related topics. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Consensus forecasts are mean averages of individual panellists’ predictions of the performance of various economies over a given time. However, most forecasters would also attach some probability to various – perhaps radically different – outcomes or scenarios. These probabilities provide a wider assessment of the risk attached to the consensus and are often based on unexpected or extreme movements in key variables, such as exchange rates or commodity prices, which could alter a central forecast. Alternatively, they could also reflect a more uncertain economic climate. Every year in January, we ask our panellists to supplement their central forecasts for GDP growth, inflation and the current account balance for the year ahead with a set of probabilities of the outcomes falling in specified ranges shown in the tables. The ranges differ from country to country and from variable to variable, but were chosen so that the central range (the middle column in the tables and charts) encompassed the consensus forecast from last month's survey. We also show probability distributions for oil prices as well as for the major cross rates of the G-7 currencies. Here, we ask for the probability of the percentage change in the exchange rate between the survey date and January 2009 falling in seven set ranges. The results are shown above. 
The US economy, meanwhile, shows a 41% chance of dropping below 1.5% growth (the consensus for 2008 GDP growth stands at 2.0%) with panellists even assigning a 3% likelihood of negative growth for this year as a whole. With a 41% likelihood that US inflation will surge above 3.0% this year, the Federal Reserve faces an acute dilemma: should it prioritise GDP growth fundamentals and reassure the battered credit markets by cutting rates? Or should it focus on anchoring future inflation expectations? By contrast, the European Central Bank has emphasized its readiness to raise interest rates should price pressures build, despite worries across the region about the muted growth outlook (especially in France, Germany and Italy). Indeed, respondents attach a whopping 81% probability of Euro zone growth at or below 2.0% this year. Prospects for all G-7 countries have been affected to an extent by soaring oil prices, and there is a 22% likelihood that crude will again surge above US$100 per barrel by end-January 2009.