“The only function of economic forecasting is to make astrology look respectable,” said the late John Kenneth Galbraith. As The Conference Board prepares to release its annual Global Economic Outlook this week, we’re reminded once more of the limitations of our profession.
Today more than ever, forecasters not only struggle for accuracy, but to avoid completely missing the next big thing. Will we finally emerge from the global economic and financial crisis into a new period of high growth? Or are we heading toward a long period of what is now often called secular stagnation?
Since the global financial and economic crisis, The Conference Board has consistently predicted slow growth rates relative to the consensus among forecasters—and rightly so, it seems. Average global growth in the past three years has hovered around 3 percent. And next year’s projected growth rate, which we will publish on Wednesday, will not show much strengthening.
Whether we are ultimately right or wrong, assessing our projection will be good sport for any forecaster. Some are right more than others, but no one has ever been right on all accounts. This leads to the important question: What should the user make of all the forecasts out there? Is it better to count on the optimists and try to ride the wave? Or is it smarter to go with the pessimists and avoid being hammered in case of a downturn?
At the moment, despite the many downward adjustments in public and private forecasts, business leaders seem to be favoring the optimists. Their confidence has been pretty high in the past year, as shown in our annual CEO Challenge Survey —even though our quarterly CEO Confidence Survey shows that expectations on Europe and emerging markets have recently weakened. But the cost of overly positive thinking can be high. Firms may hold on to their current business model too long if they believe the pre-crisis world will return once demand recovers. Then, when the topline slows, cost restructuring is their only option. Repeated cycles of dashed hopes and cost-cutting can put the bottom line at risk.
But pessimism carries its own downside risk. Long-term stagnation may move business leaders to hunker down: to slow their investments in new technologies and innovation, people skills, and the new processes, products, and services that are necessary to improve efficiency. When businesses leave opportunities on the table for too long, they make slow growth a self-fulfilling prophecy of their low expectations. They may also fall behind their competition and miss the boat on new technologies and products as they come about.
Clearly, following too narrow a vision, whether it be hopeful or gloomy, poses risks. Instead of putting all their firms’ eggs in one basket, business leaders can better prepare themselves by sketching more than one possible trajectory. This is especially so for investment strategies with long payback periods. For example, The Conference Board’s Global Growth Scenarios project take into account the ability – or the lack of it – for government and business to manage emerging labor shortages, to accelerate productivity, and to foster investment in new technologies and innovations. These scenarios help business leaders avoid the danger of falling asleep at the wheel. Those who remain alert and aggressive during this slow-growth period will continuously challenge the efficiency of business, stay innovative and agile, and prevail when the pace of growth eventually quickens.
Watch for next Wednesday’s global outlook from The Conference Board. We think we’ll be right, but hedge your bets by preparing for every eventuality. To quote another prophetic thinker, novelist William Gilmore Simms: “Economists put decimal points in their forecasts to show they have a sense of humor.”
Bart van Ark is executive vice president and global chief economist of The Conference Board, a global business research think tank headquartered in New York which includes 500 of the top-2000 global c…