Polls on Topical Issues

In addition to regular monthly surveys of economic forecasts, Consensus Economics also undertakes special surveys for long-term forecasts, quarter-by-quarter forecasts and many other economic-related topics. We set out below examples of three of our recently conducted special surveys.

1) Factors Affecting Exchange Rates

2) Trends in Productivity and Wages

3) Forecast Probabilities

FACTORS AFFECTING EXCHANGE RATES

In our March 2011 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.

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.

While we ask our panellists to assign scores to six main factors as independent variables, it is clear that they are interlinked to a large degree. Most countries have entered 2011 on a more mature phase of the business cycle, at least in terms of production. However, the onset of deficit-reduction by governments is curbing domestic demand, making the expansion reliant on exports. Uneven fundamentals in most economies have cast doubt on the momentum behind already slowing recoveries. And the challenging financial climate has significant implications for interest rates and inflation, which is climbing on higher food and fuel prices. Ominously, the quake and tsunami crisis in Japan has added to concerns about output and further dampened prospects of monetary tightening. Nominal interest rate differentials are considered the most powerful drivers of FX movements, followed closely by relative growth.

In addition to the factors ranked at our request by panellists, we also asked for suggestions of others. 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. ‘Sovereign debt risks’ are, unsurprisingly, a key consideration for the euro and the Swiss franc, though for different reasons. Similarly, ‘Regional Risk Sentiment’ is important for the Czech and Polish currencies, as a crisis in confidence in one country can quickly spread to another.

 

Source: Foreign Exchange Consensus Forecasts, March 2011.

TRENDS IN PRODUCTIVITY AND WAGES

In our August 2011 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 2023, 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.

Although the recession in the United States officially came to an end in Q3 2009, the loss in output was so significant that the economy is still not fully recovered. Indeed, recent turmoil regarding Congress’s inability to grasp the nettle and deal with the government’s massive debt overhang brought back memories of the 2008 financial crisis. Part of the deleveraging process back then included heavy layoffs. Employment has currently not rebounded to pre-crisis levels – indeed, the lacklustre labour market remains an ongoing concern. The layoffs propelled productivity growth to high rates of expansion in 2010, both in terms of real output (GDP) per employee, as shown above, and as nonfarm business output per hour, as measured by the US Bureau of Labor Statistics (BLS). Latest BLS data show that total output per hour was revised from 1.9% (y-o-y) to 1.2% in Q1 2011, down from 4.1% throughout 2010. In addition, Q2 recorded only a 0.8% increase. Part of this was due to a modest improvement in unit labour costs. Our panel’s own forecasts for real output per employee suggest that productivity will reach a mere 0.9% for the year as a whole, likely due to the faltering pace of GDP growth. Productivity may conform to rates of advance more in line with those in Western Europe going forward, and this would be at odds with the strong expansion in productivity in the 1990s.

For further information, including economic data on other countries, see the complete study in Consensus Forecasts, August 2011.

FORECAST PROBABILITIES

In our January 2012 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 2012, 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 2013. 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.

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 2013 falling in seven set ranges.

The United States has seen a rocky few years following the financial meltdown of late 2008. With fiscal support ebbing and the job situation increasingly fitful, 2011 appeared to signal a return to stagnating activity. However, in recent months, public indebtedness and currency upheaval in the Euro area has distracted from the US’s own sizeable fiscal hole. Furthermore, recent indicators have been pointing to some relief in the employment and industrial sectors. In spite of increasing optimism over the outlook, our US panellists assign a 34% probability of GDP growth of 1.8% or below – under the current consensus of 2.2%. As the chart below shows, GDP forecast probabilities are skewed toward the downside. Similarly, there is a 40% likelihood of inflation tracking below the 1.9% consensus.

Following surging inflation of 4.4% in 2011, price pressures in the United Kingdom are expected to moderate this year, with a 71% probability attached to inflation averaging 3.2% or below. Inflation is still likely to far exceed the Bank of England target rate of 2%, though. Even more worryingly, the UK GDP probability chart shows a 46% possibility of recession in 2012. Our German panel assigns a 34% chance of negative growth in 2012, too, as the effects of the Euro zone crisis rein in activity. One of the main factors exacerbating the euro crisis is the size of the German current account surplus in comparison to the rest of the Euro zone and this is likely to hold, with our panel assigning a 69% possibility to it exceeding e114.6bn. Falling demand in Germany has alleviated inflation worries, with only a 33% probability that consumer price increases will exceed the ECB limit of 2.0%. Our Italy panel is more concerned about inflation, assigning a 56% likelihood to price rises hitting 2.0% or above. This is coupled with an economy in disarray: there is a 95% probability that GDP will contract by more than -0.7% in 2012.

The US dollar has been strengthening since we last conducted this survey, partly influenced by euro uncertainty and a flight to US liquidity. The euro is more likely to depreciate through to January 2013. Risks around the yen, UK pound and Canadian dollar are more balanced.

 

For further information, including economic data on other countries, see the complete study in Consensus Forecasts, January 2012.

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