By Johan Els Chief Economist: PSG Financial Services · PSG Financial Services
People often ask economists for forecasts. I think they’re asking the wrong question.
Forecasting is important, but economics isn’t about predicting the future with certainty. It’s about understanding how economies work, weighing probabilities and constantly updating your views as the facts change.
Over the years I’ve probably learnt less about making forecasts and more about how to think.
These are some of those lessons ________________________________________
1. *Economics is the study of human behaviour* Economics is not physics.
People don’t always behave rationally. Confidence changes. Expectations change. Politics changes. Markets overreact. Consumers panic. Investors become greedy.
Because economics studies human behaviour, it can never be an exact science.
Models are useful.
Judgement is indispensable.
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2. *Debate gets us closer to the truth*
I’ve always encouraged audiences to disagree with me.
Tell me where I’m wrong.
Challenge my assumptions.
Ask the difficult questions.
If we don’t debate, we don’t get closer to the truth.
I’ve never believed the purpose of a presentation is to convince people I’m right. The purpose is to improve everyone’s thinking – including my own.
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3. *I’m never the cleverest person in the room* Fortunately.
That forces me to listen.
If somebody has a different view, I want to understand why.
Good ideas don’t care who they come from.
Humility isn’t weakness.
It’s one of the best risk-management tools an economist can have.
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4. *Think in scenarios, not certainty*
Every forecast starts with a base case.
By definition, that means the most likely outcome – more than a 50% probability.
The remaining probability belongs to alternative scenarios.
Importantly, a risk scenario isn’t necessarily negative.
An upside surprise is also a risk because it differs from the base case.
Good forecasting isn’t about certainty.
It’s about assigning probabilities.
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5. *Never fall in love with your forecast* When the evidence changes, the probabilities change.
Changing your view isn’t an admission of failure.
It’s exactly what good economists should do.
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6. *Markets look forward*
Economic data describe yesterday.
Markets price tomorrow.
That’s why markets often recover long before economies do.
It’s also why markets usually turn before the headlines improve.
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7. *Ignore the noise*
Every day brings another political headline.
Another inflation number.
Another Fed speech.
Another geopolitical crisis.
Most of these matter far less than investors think.
The medium-term trend almost always matters more than the next data release.
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8. *Direction matters more than level*
Markets don’t reward perfect fundamentals.
They reward improving fundamentals.
That applies to companies.
It applies to economies.
And it applies to currencies.
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9. *Confidence is an economic variable*
Confidence isn’t just sentiment.
It drives investment.
Investment creates jobs.
Jobs create income.
Income supports spending.
Confidence is probably the cheapest economic stimulus any government can create.
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10. *Growth solves almost everything*
Higher growth improves tax revenues.
It stabilises debt.
It attracts investment.
It creates employment.
It supports the currency.
Many of South Africa’s problems become far easier to solve in a faster-growing economy.
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11. *Structural reform beats short-term stimulus* Governments often search for quick fixes.
There usually aren’t any.
Removing bottlenecks.
Improving logistics.
Fixing electricity.
Strengthening institutions.
Encouraging private investment.
Those changes last.
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12. *Institutions matter*
Strong institutions don’t make headlines.
Weak institutions do.
South Africa’s Constitution.
The judiciary.
The Reserve Bank.
National Treasury.
A sophisticated financial sector.
These are long-term national assets.
Markets eventually reward institutional strength.
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13. *Think relatively, not absolutely*
Investors never compare South Africa with perfection.
They compare South Africa with the alternatives.
That’s why improving relative performance matters more than absolute perfection.
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14. *Volatility is not direction*
I’ve spent many years explaining that investors confuse volatility with trend.
The rand will always be volatile.
Equities will always experience corrections.
Volatility tells us almost nothing about the long-term destination.
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15. *When markets go on sale…*
I’ve often used this analogy.
When Woolworths or Checkers has a sale, people rush to buy because prices are lower.
When financial markets go on sale, investors often rush to sell.
Human behaviour explains much of investing.
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16. *Sit on your hands*
Covid reinforced an old lesson.
During periods of maximum uncertainty, doing nothing is often the hardest—and best—investment decision.
The V-shaped recovery after Covid reminded us that markets recover long before confidence does.
The difficult question was never whether the economy would recover.
It was what happened after the recovery.
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17. *Long-term investing requires emotional discipline* Markets will scare you.
News headlines will scare you.
Politics will scare you.
Successful investing isn’t about eliminating uncertainty.
It’s about resisting the temptation to react to every headline.
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18. *The world changes*
The biggest investment mistakes happen when investors assume yesterday’s trends continue forever.
Twenty years ago developed markets looked stronger than emerging markets.
Today many emerging markets have better growth prospects and healthier public finances than developed economies.
The world changes.
Investment frameworks must change with it.
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19. *Relative improvement creates opportunity* South Africa doesn’t need perfection.
It needs improving fundamentals.
That is how ratings improve.
That’s how investment returns.
That’s how currencies strengthen.
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20. *Always ask one question*
Not:
“Where are we?”
But
“Where are we going?”
Markets reward direction.
Not today’s level.
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A few isms
• Growth solves almost everything.
• Markets reward improving fundamentals, not perfect fundamentals.
• Direction matters more than level.
• Confidence is probably the cheapest stimulus government can provide.
• Economics is the study of human behaviour.
• Debate gets us closer to the truth.
• Think in scenarios, not certainty.
• Never confuse volatility with long-term direction.
• Markets look six to twelve months ahead.
• Good forecasting is about probabilities, not certainties.
• Investors compare opportunities, not perfection.
• The medium term matters more than tomorrow’s headline.
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A final thought
After more than three decades as an economist, I’ve become less interested in making bold predictions and more interested in asking better questions.
I’ve learnt that the future is uncertain, that markets are imperfect, and that humility is an advantage rather than a weakness.
Most importantly, I’ve learnt that good economics isn’t about always being right.
It’s about weighing the evidence, listening to opposing views, debating ideas openly and being willing to change your mind when the facts change.
If there’s one lesson I’d leave with investors, it’s this:
Don’t spend your life trying to predict every headline. Spend it trying to understand the forces that shape the world over the next five or ten years. The headlines will come and go. The long-term trends are where wealth is created.
Johann Els Chief Economist: PSG Financial Services · PSG Financial Services
