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Special Surveys 1) Factors Affecting
Exchange Rates FACTORS AFFECTING EXCHANGE RATES In our August 2009 special survey of factors affecting exchange rates, we asked our panellists to rank the current importance of a range of different factors or economic indicators in determining exchange rate movements (against the US dollar, unless otherwise noted). Scores were assigned to each of the factors shown in the table below on a scale of 0 (no influence) to 10 (very strong influence). The consensus results are the averages of individual panellists' scores for each factor or economic indicator. Given that different currencies are influenced by a wide range of factors, we limited those considered to a common list of six (relative growth, inflation differential, trade/current account balance, short- and long-term interest rate differentials and equity flows, which we asked our panels to assess for every currency. In addition, we asked panellists to suggest, and rank, other factors or economic indicators which they felt to be of particular importance in determining exchange rate movements. The most frequently cited of these for each currency appear in the right-hand column of the table below, with the exception of a few currencies for which two main factors or economic indicators were equally frequently cited.
*Analysis refers to determinants of the exchange rate against the euro Exchange rates are clearly influenced by a wide range of different factors, and the importance of each varies both from country to country and, for any given currency, over time. This special survey is an attempt to compare and rank the differing degrees of sensitivity with which different currencies respond to these various influences. In addition, as these influences are frequently pushing in different directions, it should also help to determine which factors are likely to dominate. In addition to the six main factors ranked at our request by panellists (relative growth, inflation differentials, the trade or current account balance, short- and long-term interest rate differentials and equity market flows), we also asked for suggestions of other factors affecting exchange rates. The far right column in the table above shows only the most often cited or highly ranked, with the exception of a few currencies for which two main factors were both frequently cited. Commodity prices are, unsurprisingly, considered an important driver affecting ‘commodity currencies’, as their country (notably those in Latin America) depends heavily on the export of raw materials for income. Confidence in the global economic outlook (i.e. the pace and magnitude of the recovery path) is a key influence of capital flows and exchange rates. Our latest survey revealed that, in several instances, relative growth has overtaken nominal rate differentials as the most powerful driver of currency movements. This has been the case not only for the OECD industrialised country currencies, but for emerging ones in Asia and Latin America as well. Unsurprisingly, inflation has declined in importance, as immediate price risks are considered to be minimal. Expectations regarding medium-term inflation remain a consideration but the primary focus of government policy has thus far been on limiting the downturn and preventing their economies from entering an extended period of stagnation. Source: Foreign
Exchange Consensus Forecasts, August 2009. TRENDS IN PRODUCTIVITY AND WAGES In our August 2009 special survey of trends in productivity and wages, we asked our panellists' projections for growth in numbers of employees and wage or employment costs between now and 2021, along with consensus forecasts for real and nominal GDP growth over the same period. Using indices derived from these projections, we have calculated forecasts for broad measures of productivity growth (real and nominal GDP per employee) and an indicator of unit wage costs (calculated by dividing the employment cost indices by the indices of real GDP per employee). Although some of the wage definitions used are imperfect measures for total compensation per employee, our calculated indices do provide us with a general indication of future trends in unit wage costs.
Our Trends in Productivity and Wages survey contrasts the rather lacklustre pace of G-7 productivity in recent years with the likelihood that recession could help to reverse some of that down-trend, over the short-term at least. In the US, for example, massive reductions in payrolls (averaging around 500,000 a month during much of H1 2009) have provided a temporary boost to productivity, according to the US Bureau of Labor Statistics. Preliminary Q2 nonfarm business output per hour of all workers rose by 1.8% (y-o-y) following the previous quarter’s 1.0% increase. The data (released just after our survey deadline) also point to a 0.6% decline in unit labor costs, down from a 0.5% rise in Q1. Meanwhile, Consensus Forecasts’ own broad measures of US productivity – defined as real output per employee – show a muted 0.8% gain for 2009 as a whole, due to an expected 2.6% contraction in real GDP. Moreover, a 3.4% decline envisaged for employment helped to keep output per employee in positive territory. A 2.6% surge in productivity is earmarked for next year, although the trend will decelerate quickly thereafter. Swedish productivity in 2010 is expected to outpace US expectations while Germany comes a close third, on the back of the current cycle of cost-cutting. The moderation in US labour productivity over the longer-term could also be due in part to the fading impact of the IT revolution which helped to buoy activity in the 1990s and part of this decade. Productivity in the rest of the G-7 is likely to remain relatively muted, though, as demographic challenges, particularly in Japan and Western Europe, weigh on employment and growth fundamentals. For further information, including economic data
on other countries, see the complete study in Consensus
Forecasts, August 2009.
In our January 2010 special survey of forecast probabilities, in addition to their central (most likely) forecasts in the consensus economic survey, we asked our panellists to assess the probabilities of a range of alternative outcomes for each of the listed variables, i.e. GDP forecasts, consumer price inflation forecasts and the current account balance in 2010, as well as for exchange rate forecasts (for the euro, the Japanese yen, the UK pound and the Canadian dollar) against the US dollar by the end of January 2011. This analysis is an attempt to quantify the risk that these economic indicators might turn out to be significantly higher or lower than individual forecasts currently suggest, and allows us to compile consensus probability distributions to identify those areas of greatest uncertainty in the economic outlook for the G-7 industrialized countries.
Following a grim year where the United States experienced arguably its worst recession of the post-WW2 period, observers are now focusing on the long-awaited recovery. The pressing issue, however, is how strong – or weak – the revival will be. Judging by the chart (below), our US panel’s confidence is somewhat skewed towards a postive surprise, with respondents assigning a 33% probability to growth exceeding 3.3% this year (the consensus averages 2.9%).
For further information, including economic data
on other countries, see the complete study in Consensus
Forecasts, January 2010. Consensus Economics also undertakes special surveys for Long-Term Forecasts, Quarterly Forecasts, Sectoral Growth and FDI, Trade and Current Account Balances, Productivity and Wages, Economic Policy Evaluation, Factors Affecting Exchange Rates, Forecast Probabilities and many other economic-related topics. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Consensus forecasts are mean averages of individual panellists’ predictions of the performance of various economies over a given time. However, most forecasters would also attach some probability to various – perhaps radically different – outcomes or scenarios. These probabilities provide a wider assessment of the risk attached to the consensus and are often based on unexpected or extreme movements in key variables, such as exchange rates or commodity prices, which could alter a central forecast. Alternatively, they could also reflect a more uncertain economic climate. Every year in January, we ask our panellists to supplement their central forecasts for GDP growth, inflation and the current account balance for the year ahead with a set of probabilities of the outcomes falling in specified ranges shown in the tables. The ranges differ from country to country and from variable to variable, but were chosen so that the central range (the middle column in the tables and charts) encompassed the consensus forecast from last month's survey. We also show probability distributions for oil prices as well as for the major cross rates of the G-7 currencies. Here, we ask for the probability of the percentage change in the exchange rate between the survey date and January 2010 falling in seven set ranges. The results are shown above. 
The depth of the 2009 downturn has been such that a relatively robust rebound was perhaps inevitable; however, compared with the other G-7 economies featured, no other panel is assigning so significant a probability to GDP growth of above 3%. A glance at the GDP charts across pages 28-29 shows that growth probabilities are edging towards the downside – that is to say, our panellists believe there is a greater likelihood of activity falling below the midpoint average as opposed surpassing it. This is especially noticeable for Japan and France. In Japan, business sentiment remains pessimistic as a result of last year’s collapse in industrial output. The United Kingdom is a notable exception but, by comparison with the US, the UK shows only a 2% likelihood attached to growth surpassing the 3%-mark, due to a string of disappointing official data releases sowing doubts over the outlook ahead. The probability of inflation falling below the consensus forecast is also significant for the US, Japan, Germany and France. Economic and financial meltdown, coupled with deflationary pressures, prompted the major central banks to reduce interest rates to negligible levels in 2008 and 2009. Now that activity is gaining traction, the US Federal Reserve, European Central Bank, Bank of England and Bank of Canada are already looking for exit strategies to normalize interest rates. Economic fragility imposed downward pressure on the US dollar this past year, but other currencies such as the yen, euro, UK pound and Canadian dollar are expected to weaken going forward (see page 3) as policy makers see depreciation as a route to regaining trade competitiveness on the export scene.