Economist wins ‘Titanic’ victory

03 December 2012

Victory in the Economic Research Council’s inaugural Clash of the Titans economic forecasting competition has gone to economist John Muellbauer of the Institute for New Economic Thinking at the Oxford Martin School.

Professor Muellbauer took part in the contest in December 2011 in front of a large audience of business economists at London’s Royal Institution.

Muellbauer, Hashem Pesaran from Cambridge and Danny Quah, representing the London School of Economics, were asked to present their predictions for the next four quarters for growth, inflation, unemployment and the UK interest rate, and the peak French government bond yield as an indicator of Eurozone developments. They were also asked to summarise some of their recent research. Forecasts from the audience and from online submissions were also gathered, numbering 211 in total. In the audience poll on December 2011, Danny Quah’s presentation was judged the most plausible by some margin, followed by Hashem Pesaran, narrowly ahead of John Muellbauer in last position.

However, the published economic data showed that Muellbauer beat not only his two academic rivals but all 211 audience and online forecasts, while Danny Quah’s extremely pessimistic predictions were in the bottom 10% of all forecasts despite their original popularity with the audience. In early December 2011, the Eurozone looked in imminent danger of running into an accelerating ‘doom-loop’ of a sovereign debt and banking crisis, threatening the very existence of monetary union.

Muellbauer attributes the relative success of his less pessimistic forecasts to three correct calls:

(1) Anticipating that Eurozone policy makers would react just in time and indeed the European Central Bank’s LTRO (long term refinancing operation) launched in December and January proved temporarily effective. When the ‘doom-loop’ threatened to return in mid-year, the ECB responded again with the OMT (outright monetary transactions) announced in August. Meanwhile, rapid moves towards negotiating a European Banking Union had contributed to reducing pressure on peripheral banks and sovereign borrowing costs.

(2) Anticipating that the US would grow reasonably well in 2012 since the housing market would begin to recover (as had been forecast in his research with US Federal Reserve economists John Duca and Anthony Murphy), and the energy revolution would increase investment and employment.

(3) Anticipating that a further slowdown in China would reduce commodity prices, bringing some relief to stretched households in the UK and US. Unfortunately, extreme weather (likely linked with global warming, also a theme discussed in Muellbauer’s presentation) caused major crop failures, driving up global food prices. The benefits from lower commodity prices were therefore smaller than he had expected.

A striking difference between Muellbauer’s forecasts and most others concerned the UK unemployment rate as measured by the Labour Force Survey. The UK labour market has remained weak, as reflected in the rise in self- and part-time employment relative to full-time employment and the rise in the number of those employed who would like more work. However, instead of rising over the year from 8.3% to 11% by the third quarter of 2012 as forecast by Danny Quah, the unemployment rate actually fell to 7.8%.

Muellbauer will be presented with his victory award on 4 December, 2012

Further details of the ERC Clash of the Titans competition

More about John Muellbauer and his work

View the winning presentation shown at the ERC event on 6 December 2011.