GO
Loading...

Europe's Promised Turnaround Has a Huge Error Rate

Friday, 3 May 2013 | 9:15 AM ET
GSO Images | Photographer's Choice | Getty Images

Europe's turnaround is always predicted to be just around the corner—the next quarter, in the next six months, or by next year.

Those forecasts are proving to be so off the mark, that the real question is whether anyone should even pay attention to them.

On Friday, the European Commission once again cut its gross domestic product forecast for the euro zone for 2013 and 2014. It now forecasts a contraction of 0.4 percent in 2013 from a contraction of 0.3 percent forecast in February.

The European Commission promises a turnaround next year, when growth for the euro zone will bounce back to 1.2 percent, but that number has also been revised down from the 1.4 percent forecast previously.

So how seriously should we take these forecasts? Not very, according to research by Laura González Cabanillas and Alessio Terzi.

They found that the error margin on EC forecasts had increased substantially since the 2008 financial crisis.

The mean absolute error for current year growth forecasts for the 17 members of the euro zone was 0.4 percentage points between 1969 and 2011. The same number for all the 27 members of the European Union was 0.5 percentage points.

That number actually underestimates the errors because it includes a period of generally more accurate forecasts all the way from 1969 to 2008.

In other words, a forecast for a contraction of 0.4 percent this year, with an error rate of 0.4 percentage points, means the actual number is anyone's guess.

Even if we take those numbers at face value, how will that turnaround come about?

Here's what the EC said in its report released on Friday: "While net exports are projected to remain the main driver of GDP growth in the EU this year, firming domestic demand is expected to take over this role in 2014."

But all you need to do is look at the chart below. Debt is still rising and inflation is now declining. (note: this is data from the ECB for the 17 members of the euro zone).

Charles Beazley, CEO of Nikko Asset Management, which has $154 billion in assets under management, warned that Europe was already embroiled in a Japan-style "lost decade".

"I think it is a lost decade in Europe in the political sense, and how quickly they are able to change that, I do not know," Beazley told CNBC.

Contact Europe: Economy

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More