OTTAWA - Oil to soar to US$200 a barrel.
This is a good time to buy stocks.
A lot of things economic took a battering in 2008 -- from stock markets to autos to consumer confidence -- but the list wouldn't be complete without adding the pride of professional economic forecasters.
With commodities soaring in the first half of the year and plunging in the second, Wall Street financial giants collapsing, the Detroit Big Three teetering and the world heading into recession -- all surprises -- 2008 may be remembered as the year nobody got right.
"I would say this has been the most difficult (to forecast) of the last 10 years at least," says Dale Orr of IHS Global Insight, perhaps Canada's leading forecasting firm.
"It's partly because we haven't seen anything quite like the U.S. financial turmoil before."
To be fair, the past year has been anything but typical. The year began with a bang in Canada with the creation of over 46,000 jobs in January and commodity prices continuing their upward ascent to stratospheric levels.
When CIBC chief economist Jeff Rubin made his prediction of US$200-a-barrel oil in April, oil was on its way to a record high US$147 and the forecast of US$200 by 2012 seemed a gross undershoot. Not so much now with oil struggling to remain above US$40, although he has time on his side.
Perhaps even Prime Minister Steven Harper, an economist himself, can be excused for thinking on Oct. 7 that having lost one-third its value in a mere few months, the Toronto Stock Exchange was a good place to hunt for bargains. If Canadians had heeded his advice, however, they'd likely be 13 per cent poorer now.
Rubin and Harper are in good company.
With few exceptions -- including former Bank of Canada deputy governor Bill White and Harvard University's Ken Rogoff -- the vast majority of economists saw 2008 as a bumpy year, but not the catastrophe it has turned out to be.
Coming off a modest 2.7 per cent growth in real gross domestic product in 2007, Global Insight had projected this year's GDP increase would be 2.4 per cent, about the middle of most major forecasts.
The Bank of Montreal was slightly more pessimistic at 2.2 per cent, and TD Bank was decidedly gloomy at 1.9 per cent. The Conference Board saw the economy actually improving in 2008 to 2.8 per cent growth.
The Bank of Canada was more prescient with a 1.8 per cent growth figure, but it had the benefit of a few more weeks of real data to look at before it made its call on Jan. 24.
In actual fact, the economy is likely to grow by a mere 0.6 or 0.7 per cent this year when all the numbers are in.
The downside miss is the worst for Global Insight since it began its Canadian forecasts in 1993.
Those few who saw the U.S. bottom falling off "look like geniuses now," admits Glen Hodgson, chief economist with the Conference Board. The economic models just couldn't account for what happened, he said.
"We've seen periods where interests rates were very high, but we've never seen a situation where people went to the bank and were told, 'I'm sorry, your credit line is no longer available,' " he explains. "Never before have we seen the Big Three all cancel leasing. This was a totally new shock."
Another logic-defying event was the behaviour of commodity prices, particularly oil soaring to US$147 in July, then collapsing as quickly as it rose.
Critics would argue that economists are paid to predict surprises, and in a sense they do. Along with their base projections -- the ones that are published -- many economists also project worst case scenarios and these were closer to the mark.
TD Bank chief economist Don Drummond says his bank has been predicting trouble from America's artificial housing market the past three years and had under-estimated growth the two previous years when the subprime collapse did not occur. In 2008, the surprise was that when the reckoning came, it was quick and hard.
"We've had the same story back to 2005, that U.S. housing would pull back and create a pull back in U.S. consumption ... and that would pull down commodity prices, but we certainly messed up on the lag," he said.
Economists shouldn't be viewed as seers, adds Douglas Porter of BMO Capital Markets.
While the U.S. and Canadian economies were coming in weaker through most of the year, it was the mid-September failure of Lehman Brothers -- or rather the fact the investment firm was not rescued as others had been -- that really sent stock markets plummeting and once again froze up credit markets.
"I would love to be able to go back and see how (the forecasts) would have turned out if the U.S. had not let Lehman Brothers go under," Porter wondered.
Another problem with forecasting, says Orr, is that economists use models based on predictable, historic effects, such as the downward impact on housing starts if interest rates rise. But that depends on the historic relationships remaining somewhat predictable. When surprises happen, the models sometime break down.
"We always go wrong at the turning points, we're slow at forecasting recession and the same thing on the upside, we will under forecast strong growth," Orr says.
That's why economics is often called the "dismal science," he adds, or something worse.
