Sunday, December 26, 2004
Economy ends with a record run of growth
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

Here's my review of 2004 and the annual forecasting league table. Merry Christmas and a Happy New Year to all users of the site.

If 2003 was a year of two halves, 2004 has in many ways been its mirror image. The year began with the economy expanding strongly, still benefiting from what President George Bush was perhaps a little too quick to call the end of the combat phase of the Iraq war. It is ending with growth having weakened, although not enough to ruin an impressive record. In five days’ time, as I noted a couple of weeks ago, the economy will have chalked up 50 successive quarters of economic growth, comfortably a record.

The change in mood was nowhere more evident than in the housing market. In the first half of the year it was booming with abandon, making it look likely that the Bank of England would have to raise interest rates sharply to slow it. But from the summer onwards the market has been flat, resurrecting fears — still misplaced in my view — of a crash.

Was this shift due to higher interest rates, which rose steadily from 3.5% in November last year to 4.75% in August? Probably not. Rates have not risen enough to cause serious strain in the housing market. Instead, it seems it was the governor who did it. Mervyn King, Bank of England governor, warned in June that house prices could drop, and this helped to spark a change of mood. The Bank is keeping its fingers crossed that this does not presage a more pronounced downturn, or that consumer spending will slow sharply.

The other surprise was oil prices. A year ago it looked as if they might settle at about $30 a barrel — above the Organisation of Petroleum Exporting Countries’(Opec) target range of $22 to $28 a barrel, but nothing to complain about. In the event, prices topped $50 a barrel, stayed there some time, and are ending the year not far away from that level.

Expectations on oil prices have shifted fundamentally this year. Suddenly, the balance between supply and demand for oil looks tight for the indefinite future. That does not mean oil is going to stay at $50. It does mean it is going to be some $10 a barrel higher than the old Opec range.

The rise in oil prices owed something to the weakness of the dollar, and the desire of oil producers — who sell their oil in dollars — to maintain their earnings. The dollar was weak at the start of the year, recovered somewhat and then fell sharply again towards the end, particularly after Bush’s re-election.

Neither oil nor the dollar disturbed the global economy, however, which had its best year for growth in three decades. This created a good environment for the British economy. Growth topped 3% and inflation ended the year on the new Consumer Price Index measure at 1.5%. In the context of sky-high oil prices that is an extraordinary performance.

Who navigated best through the potential hazards of 2004? This was a pretty good year for the Treasury’s forecasts, although the jury is still out on its projections for public borrowing. But it was an even better one for external users of the Treasury’s own economic model.

Professor Peter Spencer, who combines an academic career at the University of York with his role as economic adviser to the Ernst & Young Item — Independent Treasury Economic Modellers — Club has come in for his share of criticism, not least from the chancellor.

But the Item forecast for this year was hard to fault and, next time he is criticised by Gordon Brown, he should post a copy of the table accompanying this article to the Treasury. Spencer also came near the top last year.

Congratulations, too, to Michael Saunders of Citigroup, a previous winner of this forecasting blue riband, who came tantalisingly close to doing it again. The economists at JP Morgan and Fortis Bank were also within a whisker of a flawless performance. So, too, was Glenn Davies of Credit Lyonnais Securities, now Calyon, who won last year, and came very close to doing so this time. In the more than 10 years this competition has been running, his record has been better than anybody’s.

He has left the bank, and so there is no forecast from him for the coming year, which is a pity.

What about the Bank of England, whose inflation forecasts we pore over every three months for clues on the direction of interest rates? The Bank, unfortunately, does not produce forecasts in a way that lend themselves to this kind of comparison. Other organisations suffer by not forecasting everything (the Treasury does not publicly predict unemployment or interest rates) or by not providing sufficient detail. Their loss, not ours.

What about my own record? Last year’s article was surprisingly unembarrassing. I had the euro’s rise above $1.30, the chancellor insisting against the odds that his golden rule would be met, no new taxes, Tony Blair remaining prime minister (that got closer than I expected in the spring), and Bush being re-elected. The housing market was even stronger than I expected, at the optimistic end of the range. My forecast was for a rise of just under 10% in prices — the outturn is closer to 14%-15%.

As for the specifics, I predicted 2.75% growth, 1.75% consumer price inflation, a £27 billion current-account deficit, a 4.5% end-year base rate and 850,000 unemployment. That was enough for eight out of 10. Not bad, although, as always, I do my own marking.

The forecasters' league table

The following is my annual forecasters' league table. The forecasts are, in order, for GDP growth in 2004, Q4 inflation - based on the consumer price index, the current account deficit in £ billion, unemployment - claimant count - Q4, base rate - also Q4, and finally the score out of 10. See end of table for the scoring system.

Outturn 3.25 1.5 -25.0 0.83 4.75 10

Ernst & Young Item Club 3.0 1.5 -28.0 0.83 4.75 10

Citigroup 3.3 1.5 -37.2 0.79 4.90 9

Fortis Bank 3.2 1.6* -16.0 0.81 5.0 9

Credit Lyonnais 3.0 1.6 -28.1 0.83 4.5 9

J.P.Morgan 3.5 1.6 -21.6 - 4.75 9

Deutsche Bank 3.0 1.6 -23.6 0.85 4.25 8

West LB 2.8 1.5 -25.0 0.88 4.5 8

Lombard Street 3.0 1.8 -22.0 0.85 4.75 8

Treasury 3.25 1.75 -29.5 - - 7

Daiwa 3.1 1.7 -34.7 0.91 4.5 7

Barclays Capital 2.8 1.7 -32.5 0.85 4.7 7

RBS Financial Markets 3.0 1.9 -27.3 0.91 4.7 7

CBI 2.8 1.8 -22.8 0.9 5.0 7

Oxford Econ. Forecasting 2.9 1.5 -34.5 0.91 4.5 6

Economy.com 2.8 1.5 - 0.91 4.5 6

European Commission 2.8 1.5 -24.0 - - 6

ING 2.8 1.6 -25.0 - 4.25 6

Economist Intellligence 2.5 1.5 -28.1 0.89 4.25 6

UBS 2.6 1.4 -20.0 0.92 4.5 6

ABN-Amro 2.8 1.9 -30.0 0.89 4.0 6

Goldman Sachs 2.9 2.0* -23.4 0.95 5.0 6

Morgan Stanley 2.7 1.5 - - 4.5 5

Cambridge Econometrics 2.6 1.5* -22.5 1.00 4.1 5

Lehman Bros 2.8 1.9 -24.2 0.94 4.25 5

National Institute 2.6 1.7 -28.0 0.94 4.2 5

Schroders 2.4 1.7 -23.1 1.10 4.5 5

Williams de Broe 2.5 1.2 -39.7 0.81 4.4 5

CSFB 2.8 1.8 - - 5.5 4

Bank of America 2.5 1.6 -13.5 - 4.25 4

Dresdner Kleinwort 2.6 1.8 -26.8 - 4.0 4

CEBR 2.4 1.2 -28.7 0.97 4.3 4

HSBC 2.4 1.8 -23.4 0.98 4.5 4

Economic Perspectives 0.9 1.5 -30.0 1.05 4.25 4

International Monetary Fund 2.4 1.5* -16.1 0.92* - 3

Experian Business Strategies 2.4 1.4 -37.3 0.92 4.0 3

OECD 2.7 1.9* -38.0 0.92* 4.4 3

Global Insight 2.6 1.9* -10.7 - 4.25 3

Hermes 2.6 2.0 -15.0 0.95 4.0 3

Liverpool Macro Research 2.4 1.2* -25.4 1.09 4.3 3

Capital Economics 2.3 1.2* -15.0 1.00 4.25 2

Standard Chartered 2.3 1.9* -10.0 0.97 3.75 2

Isis Asset Management 2.2 1.9* -16.0 1.30 4.0 2

Bridgewell 1.7 2.4 -30.0 0.92 4.75 2


Scoring system: GDP growth, 3 points for 3%-3.5%, 2 points for 2.75%-3.75%, 1 point for 2.5%-4%. Inflation, 3 points for 1.25%-1.75%, 2 points for 1%-2%, 1 point for 0.75%-2.25%. Unemployment, 1 point for 0.9m or below. Current account, 1 point for within £5 billion of outturn. Base rate, 1 point for 4.5%-5%. Bonus, 1 point for predicting growth of twice or more the inflation rate. Asterisked values are calculated, mainly from RPI (inflation) or Labour Force Survey (unemployment) based forecasts.


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