Checking up on the fearless forecasters

It’s the time of year when economists and investment managers offer up their predictions for the New Year. We took a look back at last year’s forecasts and checked our scorecards to see how they did.

Mercer’s annual “fearless forecast” of 48 investment managers, released last January, proved correct on a number of fronts. Median predictions for the end of 2005 put the Canadian dollar at 85 cents US, Canadian interest rates at 3.25% and U.S. interest rates at 3%. The loonie ended the year at around 86 cents US. The Bank of Canada’s overnight lending rate currently stands at exactly 3.25%. But the managers failed to predict the Federal Reserve’s continued moves to bump up its key interest rate, now at 4.25%.

Money managers also expected Canadian GDP growth to come in around 3%, and put Canadian inflation at 2% for 2005. Though final figures from Statistics Canada are not yet in, those numbers will likely be very close to the mark, with the Bank of Canada predicting GDP at 2.8% in 2005 and core inflation hovering around the 2% level. Bank economists also predicted healthy but unspectacular economic growth in ’05. RBC predicted growth of 2.7% while Scotiabank estimated 2.5%.

In January 2005, most economists believed the loonie would continue to move higher and they were right, as the dollar gained about 3.4% last year compared to the greenback, peaking at around 87 cents US in early December. Scotiabank’s chief economist Warren Jestin was perhaps the most optimistic, suggesting that the dollar “would test the 90 cent mark” in 2005 thanks to continued Asian demand for Canadian energy reserves.

There was general agreement last year that equities would outperform bonds, but few foresaw the stellar gains on the Toronto Stock Exchange, which advanced a whopping 22% in 2005, while the S&P 500 advanced just 3% and the Dow Jones Industrial Average ended the year flat. Mercer’s investment managers believed equity market returns would average around 7% last year.

Jeffrey Rubin, senior economist at CIBC World Markets predicted the TSX would end ’05 around the 10,000 point mark, a gain of about 10%. “Investors should have a good shot at double-digit returns,” he said.

Economists were generally off the mark on the energy front, with most predicting a drop in crude oil prices in 2005, following record-breaking numbers posted in the previous year. BMO’s Rick Egelton saw prices falling to $30 or $35 a barrel, but oil stayed strong in 2005, ending the year at $61a barrel.

We’ll get a chance to hear the forecasts for 2006 later this week. The Economic Club of Toronto hosts a breakfast meeting on Wednesday featuring Jestin, Egelton, TD’s Don Drummond, Avery Shenfeld of CIBC World Markets and RBC’s Craig Wright.

On Thursday, the Empire Club also features its annual investment outlook luncheon with Anthony Fell, chair of RBC Capital Markets, David Rosenberg of Merrill Lynch and Miklos Nagy of Quadrexx Asset Management.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com