Horse-Gambling Frenchman Parlays System Into Best U.S. Forecasts
French economist Christophe Barraud traces his passion for forecasting to his teenage years, when he and his father bet on horses at tracks around Nice. At a 2002 race, they wagered 100 euros on a winning pair of horses -- the short-odds darling and a long-odds entrant -- and doubled their money, mostly from the latter’s second-place finish. The payoff spurred Barraud, then 16, to dabble with rudimentary computer models to pick the most-profitable bets in sports.
By age 20, he and a friend had created a website for gamblers to predict outcomes of tennis matches, European football games and even elections.
“My first idea was to look at how you could expect to win by comparing bets on favorites and long shots,” Barraud, 27, says. “It was an attempt at systemization. They were very simple models.”
Since then, Barraud has enhanced his predictive powers enough to capture the top spot in the annual Bloomberg Markets ranking of forecasters of the U.S. economy, the magazine will report in its January issue. Barraud, the chief economist at Market Securities LLP in Paris, looks at about 30 data points monthly and hones that down to a maximum of eight before making his call on gross domestic product growth.
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The German team of Bernd Weidensteiner and Christoph Balz, both economists at Frankfurt-based Commerzbank AG, nabbed the No. 2 position for their predictions on the U.S. economy. They say they rely on gut instinct as well as hard numbers in making their forecasts.
Although the Frenchman and the German team are next to each other in the ranking, their views on austerity are far apart. Barraud argues that deficit reduction in fiscal 2013 threatened to derail the U.S. recovery; the Germans contend the spending cuts were a good move for growth.
JPMorgan Chase & Co. forecaster David Mackie, a Briton who says that economies are naturally inclined to expand, claimed the No. 1 position for the euro zone.
Bloomberg Markets ranked estimates made by 101 forecasters for the U.S. economy, using the latest two years of data reported as of Oct. 1. They made predictions on a total of 15 monthly indicators, such as housing starts, unemployment and GDP.
For the euro zone, we considered the calls of 74 forecasters who covered a total of 11 indicators, including consumer price index and industrial production, during the same period.
As of mid-November, Barraud predicted U.S. GDP would grow about 1.7 percent in 2013, down from 2.8 percent in 2012. He says American politicians didn’t heed the warning from the euro zone, where an austerity campaign prolonged an 18-month recession that ended in mid-2013.
U.S. lawmakers raised taxes on individuals earning more than $400,000 a year and allowed automatic sequestration cuts to reduce the budget deficit by about $450 billion in fiscal 2013, which Barraud says put a drag on growth.
“Too much austerity too soon is a problem,” he says. “In the U.S., we had one quarter in fiscal 2013 in which growth was close to zero. They were taking a lot of risks with the recovery.”
Barraud forecasts that U.S. growth will accelerate to 3 percent in 2014 if politicians keep spending cuts to a minimum and don’t repeat October’s 16-day government shutdown, which he predicted would shave 0.4 percent from fourth-quarter GDP. He says the addition of about 200,000 jobs monthly in 2014 and continued bond purchases by the U.S. Federal Reserve would drive the expansion.
In making prognostications, Barraud likes to examine other economists’ outlying forecasts in search of fresh data. In 2011, after discovering that an economist’s low monthly jobs prediction, which was based on a strike at Verizon Communications Inc., turned out to be accurate, Barraud began integrating labor walkouts into his own work.
“I look closely at other forecasts,” he says. “When there’s one that’s way out of the consensus, I try to understand why.”
Weidensteiner, 43, and Balz, 46, say that austerity has been the right medicine for countries such as Ireland, Spain and the U.S. The Commerzbank economists say America is reducing its deficit to a projected 3 percent of GDP in fiscal 2014 from 6.8 percent in 2012, setting the stage for faster expansion. The team forecasts that the U.S. will grow 2.8 percent in 2014 as a recovery in real estate lifts construction and improving economies around the world spur demand for American exports.
“Many people feared that fiscal policy would derail the whole recovery,” Balz says. “But it didn’t, and the politicians proved right to let the sequester kick in.”
In Europe, Weidensteiner says, austerity has helped Germany race ahead of its rivals. Germany, which had a deficit of 4.2 percent of GDP in 2003, cut its way to a budget surplus by 2007. Since then, it has mostly led the euro zone’s major economies, expanding 0.7 percent in the second quarter of 2013.
“Being German economists, we see deficit cutting as a good thing,” Weidensteiner says.
JPMorgan’s Mackie, 55, says the euro zone will expand in 2014 for the first time in three years. Mackie, who’s based in London, says the decision by European leaders in 2011 to force Greece’s bondholders to forgo full repayment of their securities caused borrowing costs to surge for many countries and plunged the region into a recession. The spending cuts by governments across Europe that started in 2011 made the contraction worse.
“Yes, austerity could have been paced much more gradually,” he says. “But it was really the financial stress that dominated. That was what put us back into recession.”
The European Central Bank’s announcement in September 2012 that it was ready to buy government bonds set Europe on the path to recovery and is the backbone of Mackie’s forecast for 2014. He sees the region expanding 1.3 percent as pressure from deficit reduction fades; purchasing power improves, thanks to low inflation; and global demand for exports grows.
Mackie, who began examining economies at the Bank of England in 1984, says forecasting should start with the notion that countries are inherently tilted toward growth.
“People are energetic and entrepreneurial,” he says. “The natural inclination is to grow. Then you ask what are the head winds and tail winds that are restraining that tendency or pushing it forward.”
The competition for the top forecasting firms included those that produced estimates for the U.S. or the euro zone and at least three other countries in our rankings. JPMorgan Chase claimed the top honors for the second year in a row.
Goldman Sachs Group Inc. economist Song Yu won the lead spot for his forecasting of China’s economy in an era of slower growth. The government is shifting its investment strategy and tightening credit while its largest banks book losses from a surge in bad loans.
Song, who was also No. 1 in our prior year’s ranking, says a big dip in public investment early in 2013 as President Xi Jinping came to power slowed the expansion of the world’s second-largest economy. Beijing-based Song, 35, estimates that China grew 7.6 percent in 2013, down from 7.8 percent a year earlier.
In 2014, Song sees growth nudging up to 7.7 percent, fueled by more government spending on environmental protection and health care. Chinese exports, which rose 8 percent in the first nine months of 2013, should also charge the economy.
“Early in the year, the investment rate fell close to zero,” says Song, who previously worked at the Fed and at the Organization for Economic Cooperation and Development in Paris.
“I don’t think that’s what’s needed, and the new government seems to share that view. At the same time, exports have picked up, so we are relatively optimistic.”
Although the No. 1 forecasters say 2014 will be a better year for the U.S., euro zone and China, their predictions of small gains show that the biggest economies are still finding their stride six years after the financial crisis. “Public spending has been reduced in most big economies,” Barraud says.
“The global economy should see an improvement, not a huge acceleration.”
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