Biggest Macro Misses of 2019

I wasn't going to do this. I figured that after doing five years of "Biggest Macro Misses" that I had probably made my point. Economic and financial market forecasts that are rolled out at year end tend to be a poor guide for investment decisions for the year ahead. However, 2019 has seen both some of the biggest macro misses in years, but at the same time some remarkably good predictions of global equity market performance. 

So, as another year comes to a close, here I go again. For probably the last time, I will review how the macro consensus forecasts for 2019 that were made a year ago fared. 

Each December, I compile consensus economic and financial market forecasts for the year ahead. When the year comes to a close, I take a look back at the forecasts and compare them with what we now know actually occurred. I do this because markets generally do a good job of pricing in consensus views, but then move --  sometimes dramatically --  when different economic outcomes transpire. When we look back, with the benefit of hindsight, we can see what the macro surprises were and interpret the market movements the surprises generated. It's not only interesting to look back at the notable global macro misses and the biggest forecast errors of the past year, it also helps us to judge what were the macro drivers of 2019 investment returns and to assess whether they are sustainable.

Real GDP

A year ago, forecasters were overly optimistic about 2019 real GDP growth in the major economies. Weighted average real GDP growth for the twelve countries we monitor is now expected to be 3.0%, falling well short of the consensus forecast of 3.6% made a year ago. In the twelve economies, real GDP growth fell short of forecasters' expectations in eleven and met expectations in just one. The weighted mean absolute forecast error for the twelve countries was 0.6 percentage points, the biggest miss since 2015.

Based on current estimates, 2019 real GDP growth for Developed Market (DM) economies was 1.8% or 0.4% below last December's forecast, while growth for the Emerging Market (EM) economies that we follow was 4.6% or 0.7% below the forecast. Mexico, India, Australia and Korea had the biggest downside misses. 

CPI Inflation

Just as for global growth, the consensus forecast for global inflation for 2019 was off the mark, overestimating inflation in most countries. Nine of the twelve economies are on track for lower inflation than forecast, while inflation was higher than expected in just two countries. The weighted mean absolute forecast error for 2018 for the 12 countries was 1.0 percentage points, again the biggest forecast misses since 2015.

The biggest downside misses on inflation were for Mexico (-1.6 pct pts), Korea (-1.5), the Eurozone (-1.0) and Brazil (-0.9). The biggest upside misses were for India (+2.8 pct pts) and China (+1.9), where food prices rose much more than expected.

Central Bank Policy Rates

In 2019, economists' forecasts of central bank policy rates missed badly. Ten of the twelve central banks either unexpectedly cut their policy rate or failed to hike their policy rate by as much as forecast. Two central banks met expectations by standing pat.

In the DM, the Fed was expected to hike the policy rate by 75 to 100 basis points but instead did a U-turn and cut rates by 75bps. Most other central banks followed the Fed's lead, eschewing rate hikes and cutting rates instead. Japan's BoJ  and China's PBoC met expectations by leaving their policy rates unchanged. The Bank of Canada and the Bank of England held rates steady rather than delivering expected rate hikes. Policy rates fell much more than expected in most EM economies, even in India and China where inflation surprised to the upside. 

10-year Bond Yields

Unfortunately, I was unable to collect meaningful 10-year bond yield forecasts for EM economies last year, so I will just compare DM forecasts with actual outcomes for 10-year yields. 

For a second consecutive year, in all six DM economies that we track, 10-year bond yields surprised strategists to the downside. The US 10-year Treasury yield as expected to rise 55bps in 2019 as the Fed was expected to continue to tighten. Instead, US growth and inflation were weaker than expected, The Fed eased and the 10-year Treasury yield fell over 90bps. The weighted average DM forecast error was -1.22 percentage points, the biggest downside average miss since I began doing this in 2014. The biggest country miss was in Australia (-1.87 pct pts). The Aussie bond yield error was bigger than the year-end bond yield (1.60%). In the EM, bond yields also fell as global growth and inflation disappointed. 

Exchange Rates

With the Fed doing a policy U-turn in early 2019, most exchange rate forecasts were upset. How currencies fared depended in large part on the degree to which other central banks matched the Fed's policy shift. All of the major currencies were weaker than expected against the US dollar. The weighted mean absolute forecast error for the 11 currencies versus the USD was 3.5%.

A year ago, most forecasters thought that after the USD had outperformed all expectations in 2018, other major currencies would rebound somewhat. Weaker than expected growth and inflation kept the ECB in ultra-accommodative mode and the Euro weakened rather than strengthened. Australia was another case where growth and inflation badly undershot expectations and the RBA responded by unexpectedly easing by as much as the Fed, sinking the Aussie dollar. In contrast, the Bank of Canada kept it's policy rate steady despite weaker than expected growth and the result was a stronger than expected Canadian dollar.    

The biggest FX forecast misses for the DM economies were for the Euro (which was 7.4% weaker than expected) and the Australian Dollar (-6.9%). Among EM currencies, China and India saw depreciations that were in line with expectations, while Mexico and Russia experienced appreciations that were larger than expected as oil prices firmed. 

Equity Markets

News outlets gather equity market forecasts from high profile US strategists and Canadian bank-owned dealers. A year ago, after a sharp global equity market correction in 4Q18, equity strategists were optimistic that North American stock markets would post a strong rebound in 2019. As shown below, those forecasts called for 2019 gains of 21% for the S&P500 and 13% for the S&PTSX Composite. They were right, but for the wrong reason. Global growth and inflation surprised forecasters to the downside, causing the Fed and other central banks to do a policy U-turn. Both bond and equity markets surged on the unexpected central bank reversal. 
  

As of December 29, 2018, the S&P500, was up 30.3% year-to-date (not including dividends) for an error of +8.9 percentage points. The S&PTSX300 was up 20.7% for an error of +7.7 percentage points.

Globally, after horrible performance in 2018, stock markets rallied back along with US equities. US equities generally had more modest losses in 2018, followed by bigger gains in 2019 than other global equity markets. 

Investment Implications

In 2019, global macro forecast misses were the biggest since 2014-15. Global growth and inflation were both weaker than expected, but an unexpected policy U-turn by global central banks resulted in unexpectedly strong returns for bonds and an even bigger than expected rebound in global equities from the late-2018 correction.  

For Canadian investors, the appreciation of CAD against the USD meant that returns (in CAD terms) on foreign equities and government bonds were reduced if the USD currency exposure was left unhedged. US equities still outperformed Canadian equities in CAD terms, but Canadian equities outperformed most other global equity markets if foreign currency exposure was left unhedged. Meanwhile, Canadian bonds outperformed US Treasuries and other foreign government bonds in CAD terms despite the lack of policy easing by the BoC.

As 2020 economic and financial market forecasts are rolled out, it is worth reflecting that, for a variety of reasons, such forecasts have been a poor guide to investment decisions for several years running. While forecasters' are once again optimistic in light of the partial trade truce between the US and China, the lesson of 2019 is that forecasters have very limited ability to provide actionable investment guidance. 2020 will undoubtedly once again see some large consensus forecast misses as new surprises arise.