Admitting Problem Is First Step as HSBC Ditches ‘Optimism Bias’Simon Kennedy
If recovery starts by admitting you have a problem, then HSBC Holdings Plc economists are taking the first step.
They say they’ve overestimated global growth prospects for each of the last three years by being too upbeat after the 2008 financial crisis. They’re now taking corrective action.
“There is an optimism bias, largely reflecting an attachment to pre-crisis growth trends which, post-crisis, have mostly remained out of reach,” according to a report published last week by the team led by Stephen King, HSBC’s global head of economics and asset-allocation research. “Our latest projections are consistent with this sense of ennui.”
HSBC hasn’t been alone.
Its economists found that since the crisis their industry’s average estimate of inflation proved off by at least 1 percentage point in the U.S., U.K., Sweden and Spain and by 0.7 point in Germany. Those are big misses given that most major central banks target 2 percent inflation.
Divining growth has also flopped. In the U.S., for example, economists reckon expansion should be as much as 3 percent in the long run, yet it has averaged just 2 percent since 2000, according to HSBC.
HSBC economists have cut their forecasts for global growth in each of the past three years. They did so again last week in reducing their 2014 forecast to 2.4 percent from 2.6 percent, which was down from the 2.8 percent seen at the end of 2012.
The list goes on: Printing money was supposed to lead to higher inflation, yet hasn’t. A run-up in equity prices has failed to ignite economic activity, and house prices are booming even with weak inflation.
‘Rules of Thumb’
Behind the errors lay a reliance on “simple rules of thumb,” say the London-based King and his colleagues. Economists are suffering from a bias toward optimism that suggests economic drivers are the same now as before 2008.
What they have ignored in part is how companies have reacted to the post-crisis world. Take services inflation: Before 2008 it was steady at about 3 percent in the U.S. and 2.5 percent in the euro area. After, it dropped to 2 percent and 1 percent respectively.
Businesses are also signaling a permanent downshift in price expectations by restraining investment despite cash surpluses and cheap financing costs, said HSBC. A report by Standard & Poor’s yesterday said global capital expenditures fell 1 percent in 2013 and will likely to so again this year.
The upshot for the HSBC economists is that central bankers have suffered from the same malaise. They, too, will probably miss their inflation targets of about 2 percent.
“Either the post-crisis financial hangover is longer-lasting than the majority of economists expected, or instead the world economy has succumbed to a lower structural rate of economic growth,” they said.