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Evolving Expectations in a Volatile World Navigating the uncertain seas of forecasting

As we step into 2024, it's clear that it might be as laden with unforeseen events as 2023 was. My extensive experience in the financial sector has ingrained in me one crucial lesson: anticipate the unanticipated. This past year has been a rollercoaster of interest rate hikes, banking crises, market fluctuations, and technological failures.

Embarking on 2024 might evoke a sense of dread and a pessimistic outlook. Yet, my inner optimist suggests that amidst the shockwaves and negative headlines, there's room for unforeseen, positive developments that could alleviate some of the palpable tension.

Despite many analysts, experts, and — let's say it — economists making a livelihood from audacious forecasts and market interpretations, reality often proves us wrong. Consider the bafflement and challenges faced by central bankers, despite their extensive resources and information. In this era rich with data, they still grapple with understanding inflation trends and other market-driving factors.

A few months back, the Federal Reserve's Jay Powell acknowledged the complexity of forecasting: “Forecasting is very difficult. Forecasters are a humble lot, with much to be humble about.” A statement from a world-class expert, humbly accepting his limitations during the festive season.

The Bank of England's Sarah Breeden commented on forecasting errors, citing a backdrop of “unprecedented shocks”. Perhaps our collective error has been the assumption of predictability in world events. The term 'unprecedented' implies unpredictability. It's likely that Ms. Breeden was hinting at these occurrences being beyond the Bank's predictive models.

Central banks and their economists depend on data-driven models. However, the real world often defies these models. There's also the issue of data quality and selection, crucial for sound conclusions. This reminds me of my first computing lesson — 'garbage in, garbage out'. Decades later, this principle still applies: poor data leads to poor forecasts.

The growing skepticism towards economic forecasts has sparked political reactions. A faction of British politicians recently urged the chancellor to address the forecasting inaccuracies of the Office for Budget Responsibility. Their demand for politically aligned forecasts, however, won't enhance forecasting accuracy.

Consequently, the flaws of inadequate data may be compounded by individual biases, political leanings, and group-think among central bankers. Here, artificial intelligence could offer a fresh perspective, analyzing a wider array of scenarios with fewer human biases.

Yet, this ventures into speculative AI applications, another topic ripe for forecasters. AI operates by assimilating vast historical data, which doesn't necessarily guarantee better predictions. Imagine a world where flawed central bank models are further destabilized by the whims of AI systems. Such a scenario could easily undermine even the most disciplined forecasters.

Rather than turning to the drinks cabinet for answers, we must soberly assess the geopolitical, demographic, and environmental risks that will inevitably emerge in 2024. Central bankers and forecasters must exercise judiciousness in their predictions. Pessimistic economic forecasts risk becoming self-fulfilling prophecies.

Finally, forecasters are acutely aware of the political pressures stemming from de-globalization. The global political landscape is striving to shield national interests from worldwide shocks and influences. Yet, forces like military conflicts, pandemics, immigration, climate change, and natural disasters do not adhere to national borders. Political turmoil in 2024 adds another layer of unpredictability, potentially undermining even the most well-crafted forecasts.

Source: Tim Skeet, The Banker, Loan Analytics

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