How do you like to deal with your pessimism? Do you, as I tend to, predict the worst because, if it happens, you anticipated it and, if it doesn’t, then you are the startled recipient of an unexpected pleasure?

Doesn’t that approach work better than predicting the best and then being blasé if it does happen, or being superdisappointed if it doesn’t happen because you have built yourself up for success?

We tend, I suspect, to gravitate towards pessimism because it seems sensible to mentally prepare ourselves for a poor outcome. I was going to make a joke about being a pessimist, but I’m sure it won’t be funny. (I suspect it’s hard to find things funny if you are a pessimist.)

I recently had an edgy little interaction with a businessman whom I thought was being overly pessimistic. Economic recessions happen on average once every seven years, I said. So, I proposed, if you bet evenly on down years and up years, you are going to be wrong most of the time. His reply was simple: The first rule of the business is to stay in the game. Hard to argue with that.

All the data and predictions are pointing to a recession in the US, which means the chances of a global recession are extremely high. The Wall Street Journal surveyed 66 economists and 63% are predicting a recession in the US over the next year. This is an increase from the 49% who predicted a recession in July, so, for the first time, a coming recession is the majority view.

But here is the problem: economists have not accurately predicted a recession since records began in the 1970s. I am not making this up. The track record of economists is truly awful. My guess is that, in normal times, the balance of risks and incentives for economists strongly supports overestimating growth, because if you are working for a bank, part of your job is to encourage clients to borrow money. By that logic, when economists do in fact predict a recession, then there is a very good chance it will happen.

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You can see this tendency to overestimate growth at a macro level via the world’s pinnacle economic outfit, the International Monetary Fund (IMF). The fund produces its headline predictions in a publication called, slightly immodestly, the World Economic Outlook, which comes out once a quarter. It was predicting global growth in 2022 at 4.9% in October last year. By December — in other words, as the due date got closer — that prediction had dropped to 4.4%. In April, it was down to 3.6%, and in July it was 3.2%.

We are basically through the year at this point, and we have seen five consecutive downward recalibrations. And just a reminder, although these numbers look small, the tiniest shift means great, huge rivers of money that are now not going to flow. Global GDP is now about $98-trillion, so the IMF’s decline from 4.9% to 3.2% represents a knock of $1.5-trillion, which is three times SA’s GDP.

I think the bigger problem with economists is that they tend to be conservative on both the upside and the downside, which is why their record for predicting recessions is so bad. Their steps, sensibly, tend to be incremental, while the world can and does move more dramatically. But if you don’t want to believe economists because of their crappy prediction records, what about the market?

The two pretty reliable market indicators that a recession is about to happen are that the equity market contracts by more than 20% and short-term bonds have higher interest rates than long-term bonds. Now I’m sorry to inform you that both of these conditions are currently true, at least for the US.

So, I was just about to throw my cards in with the pessimists when I chanced on Ruchir Sharma’s article this weekend in the Financial Times, which has a very amusing premise: since economists are predicting a recession and they are always wrong, does that not indicate a recession is unlikely to happen? Or as the headline puts it, “Economists see recession coming, so maybe it’s not”.

Very droll. (Reminds me of when the Cape Times’ venerable Weatherman Pete died and some wag went back through his predictions to find that he was only 40% right about the rain or the wind or the sun, so if he’d reversed his outlook, he’d have had a better track record and we wouldn’t have got wet as often.)

But the evidence Sharma presents is fascinating: disposable incomes are keeping pace with inflation, encouraging healthy growth in consumer spending. Corporate capital expenditure is growing much faster than business revenues and earnings. The unemployment rate also remains very low at 3.7% and has barely budged despite all the Fed tightening.

What is more, personal net worth is still about $25-trillion higher than before the pandemic, so this is very unlike the Great Recession of 2007-2009 when personal debt was high. Today, for example, nearly 70% of home buyers have credit scores in the top tier compared with 20% before the financial crisis.

“The unexpected is a constant in markets and the economy, which suggests we should at least entertain the possibility that a recession is not inevitable,” Sharma concludes.

For SA, these issues are of course critically important, as they are for the rest of the world. SA’s growth for 2022 was not as badly hacked as global growth; the IMF is now predicting growth of 2.1% this year, compared with the original prediction late last year of 2.2%. Perennial underperformer that it is, it seems probable that SA will come in a bit lower than that. But the predictions for 2023 are now looking seriously dire: GDP growth for SA in 2023 at a mere 1.1%.

Eina. We better hope the economists continue their unfailing record of being wrong. DM/BM