Growth forecasts too pessimistic, says Cazenove CIO

Fund Strategy - 20 Feb 2012 | By Gary Jackson

Jeffrey views recent consensus forecasts by economists as too pessimistic.

A poll of 37 forecasters by the Treasury shows predictions increased marginally from the 0.4% recorded last month to 0.5%, although respondents still maintain growth will be below the 0.9% thought to have been seen last year.

Over the past three months, the 20 City economists consulted were more pessimistic than the 17 non-City forecasters, predicting an average of 0.3% growth against 0.4%. Standard Chartered has the most downbeat forecast at –1.3%, while Economic Perspectives’ 1.5% is the most optimistic.

Jeffrey says the City consensus, especially, is too gloomy. “That’s just the typical economist: he gets the last few data points and a 15-inch ruler, connects the dots and just extends the line down,” he says.

British GDP will grow by about 1.25% this year, Jeffrey predicts. One of the major factors driving his ­optimism is the expected fall in inflation, which is a demand-destructive influence. (News analysis continues below)

Last week, the Office for National Statistics said the consumer prices index fell from 4.2% in December to 3.6% in January. The Bank of England sees inflation falling further during 2012 to eventually dip beneath its 2% target.

Jeffrey also expects improved household spending to help growth. Thursday’s Nationwide consumer confidence index supported this view, rising from record lows in December to a five-month high in January.

Loose monetary policy, on both the domestic and global stages, and the improved outlook for the American economy will aid growth more than expected, he adds.

Jeffrey also notes the strong start to 2012 of many stockmarkets, including the FTSE 100. He says: “Equity markets are telling you that probably these forecasts are going to be proved wrong.”

”That’s just the typical economist: he gets the last few data points and a 15-inch ruler, connects the dots and just extends the line down”

James Dowey, the chief economist at Neptune Investment Management, on the other hand, does not see growth deviating far from the consensus, despite the FTSE’s recent performance.

“The recovery in the stockmarket [has been caused by] the significant eroding of the tail risk of systemic bank failure in Europe.”

Despite seeing falling inflation and further quantitative easing as positive for Britain’s growth outlook, Dowey says their influence will be unable to offset the effects of deleveraging.

The economist points out that British household debt to GDP rose from 69% to 103% between 2000 and 2008. This has been reduced to just 97% so far, meaning deleveraging will drag on growth for some time.

In addition, he argues public sector austerity is yet to have its full impact on growth. Other headwinds come in the form of restricted credit for small enterprises and the excess capacity of large businesses.

“At the end of this month we will equal the record for the longest time it has ever taken to climb out of a hole after a recession,” Dowey says.

“On current projections, the sorry thing is we’ll add another two years to that record.”

However, Jeffrey says recent data points to a recovery. Markit’s manufacturing purchasing managers’ index shows the sector unexpectedly returned to growth in January, suggesting underlying trends are improving.

“Last year was the year of hopes disappointed. This year will be a year of pessimists confounded,” says Jeffrey.

“I guarantee by the middle of this year people will have doubled their forecasts, if not trebled them.”

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