What's the point of the ESRI and forecasters generally?

G

Gerry Canning

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Brendan Burgess said:
Hi Bronte

We all get stuff wrong. Fair play to Fitzgerald for acknowledging it.

Most of the ordinary punters on askaboutmoney and magic mum disagreed with Eddie's advice.

It did seem obvious at the time, as it is now, that trackers are extremely valuable. The ECB rate was 2.5% when he made that forecast and was down to 1% within 6 months. It's 0.05% now.

While that fall could not have been forecast at the time, maybe he should not have been forecasting increases either.
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Life is full of Prophets ,
Generally prophets are worth avoiding.
Generally economist prophets are well worth avoiding.
That said , don,t we really love the Prophet of Doom when his prophecy comes true.eg Morgan Kelly, but then he was a lone voice in the wilderness.

I just wonder though , had Ire inc blown up since 2010 would we all love trackers and ECB rates linked to euro?
Mortgages by their nature carry long term risk, so if someone could have afforded a fixed rate ,?.
 
Having said that economic forecasts are based on assumptions. Unfortunately there are so many assumptions that effect the economy it is inevitable that some will go well off target which throw the figures completely out. Currently there are significant uncertainties both politically and economically that will have an impact on our future economy. Forecasters have to factor these out of the equation which means that there are large error factors in any forecast made!
 
A very interesting point.

Let's take people faced with the following decisions

Should I buy a house now or wait a year?
I have an SVR mortgage of 4.5% - should I fix for 5 years at 4.35%?
I have €100k to invest. Where should I put it if I have a 10 year horizon?

I can't forecast the future, so I do not know the certain answer to any of these questions. But, no one else knows for sure either. The problem is that some people insist that they know, when they don't.

I think we should set out the range of outcomes and risks and try to get a feel for the likelihood of each.

Take house prices. No one knows if they will be cheaper or dearer in a year. The best estimate of the price next year is probably the price today. I am sure that you will find some people insisting that house prices are too high and must fall. Others will argue that they are undervalued. The decision to buy now or wait a year should probably be based on personal circumstances.

I would feel fairly confident that someone should not fix their mortgage rate now for 5 years. I would recommend to someone that they should not fix, but point out that the ECB rate and SVR rates may well rise. If, on the other hand, a lender offers a fix for 10 years at 2%, I would feel fairly sure that an SVR holder should grab it. I wouldn't be so sure about someone with a cheap tracker.

So where should I invest €100k. I can't tell for sure that equities will outperform cash over the next 10 years, but history suggests that they will.

If I appear on a radio programme with someone who says authoritatively "Buy gold. It's clearly a good investment in the light of the devaluation of currencies which must happen as a result of QE". I will say "I don't know". Which advice do you think that the listeners would prefer?
 
The difficulty with an "I don't know" answer or an inability to forecast response is that in most circumstances we need to get some view of what the future effect will be of decisions made now. I.e. If I am proposing to play golf today, I will look up the forecast in deciding whether or not rain is likely. If it is I might decide to go shopping with my wife instead :)eek:). Economic forecasts are unreliable in turbulent times but serious financial decisions need to be made and in order to make such decisions Governments need to have some concept of what effect they will have on the future. What the forecasters will do is give their best forecast based on assumptions made. So as a decision maker I will first of all look for those assumptions and decide whether they are reasonably based on the most likely outcome. I.e. take the worst and best case scenario and then make your decision on the most likely one. Alternatively, there will be cases where decisions will need to be postponed where there are significant variations between best and worst outcomes.
In Brendan's scenario above the cautious investor will hold his 100k in cash. However, if the Euro tumbles then that would be seen as a poor decision. Perhaps the best decision would be to hedge the risk by spreading the investment! Presumably Governments will need to do this by examining all the various forecasts and outcomes before making a final decision. In these cases procrastination is not really an option.
I always live by the rule of "making a decision". Even if I make the wrong one, it was my decision rather than sitting back and waiting for something to happen.
 
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