My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt. The table to accompany the piece is available in the newspaper.
Of all the experts to be castigated in recent months in this strange climate in which we find ourselves, none have got it in the neck more than economic forecasters.
Those who try to predict the economy’s performance in uncertain and in some respects inherently unpredictable times have been attacked for getting things so badly wrong that we would have been better off consulting Paul the Octopus, who developed a reputation for correctly predicting the results of World Cup games, or popping along to the nearest fair and the fortune teller’s tent.
Even Andy Haldane, the Bank of England’s chief economist, has joined in, saying that forecasters had a “Michael Fish moment” in failing to predict the financial crisis, and an echo of it in overestimating the short-term damage from the Brexit vote. The profession, he said, was in something of a crisis.
It may surprise you, therefore, that had you taken most of the economic forecasts published this time last year, you would have been rewarded with a pretty accurate picture of what has happened to Britain’s economy over the past 12 months. In fact, in the very many years I have compiling my annual forecasting league tables, I cannot remember quite so many forecasts clustered around the outturns for the main economic variables.
At the start of last year forecasters were on average a little more optimistic on growth than turned out to be the case. But they were pretty close on inflation, expected the labour market to continue to improve and saw Britain’s balance of payments problem either persisting or getting worse.
Most, of course, would concede that the numbers are one thing, the economy’s story during 2016 another. So, while forecasts made a year ago turned out to be pretty accurate, it was a bumpy ride. This time last year we did not even known for sure whether there would be a referendum on EU membership. When it happened some, not all, responded by revising down their 2016 growth forecasts a little, though most of the serious slashing was reserved for 2017, of which more in a moment.
There are many moving parts in the economy’s performance, and the story of 2016 is instructive. A year ago the growth story most economists had constructed was one in which the economy would be subdued in the run-up to the referendum because of uncertainty and then rebound quite strongly afterwards as that uncertainty was lifted.
As it turned out, growth was not quite as subdued as surveys had suggested in the run-up to the vote – few expected second quarter gross domestic product to be as strong as 0.7% (revised down to 0.6% before Christmas) – though some elements of that weakness remain.
Business investment, for example, looks to have fallen last year, having been expected to rise. Instead of a strong post-referendum bounce, the economy maintained its momentum in the third quarter, and the purchasing managers’ surveys suggest it continued to do so in the final three months of the year. Both, admittedly, showed more resilience than economists expected – and surveys suggested – in the immediate aftermath of the referendum.
Inflation, while ending up more or less where forecasters expected, again did so by a different route. The collapse in oil prices at the start of the year, with a drop into the mid-$20s per barrel, was not widely expected. Its effect was to push inflation lower, averaging less than 0.5% in the first half of the year, providing for stronger growth in real incomes and therefore consumer spending. The rise in inflation now coming through strongly is mainly via a significantly weaker pound, coupled with a later than expected recovery in oil prices.
Interest rates were one area where forecasters were comprehensively wrongfooted. A year ago nobody was predicting a cut in rates; the debate being whether they stayed at 0.5% or began to rise gently. Instead, the Bank of England’s August response to the Brexit vote took them down to a new all-time low of 0.25%.
Having agonised about it, and recognised the strong possibility of another year of unchanged rates, I was among those who thought we would see toe-in-the-water rise to 0.75%. A cut in rates was a surprise, though not in the circumstances.
If forecasters are surprised about rates this year, it will be in the opposite direction. Economists think the Bank will either stick at 0.25% throughout the year or could even cut if the economy weakens sufficiently. I think that may underestimate the chances of a hike but, having been so low for so long, the smart money has to be against it.
As for my other predictions, I thought growth would be stronger, at 2.5%, and inflation a little weaker, at just below 1%.
Forecasters, as I say, did generally well, even if the path to the numbers was sometimes not exactly what they expected. Two did exceptionally well, jointly leading my league table. They were Chris Scicluna and his team at Daiwa Capital Markets, the investment banking arm of Japan’s Daiwa Securities, and Alan Clarke of Scotiabank, the Canadian bank which takes its name from its Nova Scotia roots. Both scored nine out of a maximum 10 in my league table and were impossible to separate. Congratulations to them.
At Daiwa, Scicluna and his colleagues are relatively downbeat about this year, expecting growth of just 1.2% and inflation by the end of the year of 3%. They also fear that the Brexit hangover will last well beyond 2017.
Scotiabank’s Clarke, taking his lead from the strong purchasing managers’ surveys and a model he helped develop which links monetary conditions to economic growth, thinks there is momentum in the economy yet. Monetary conditions are exceptionally loose, largely reflecting 0.25% Bank rate and sterling’s fall.
He thinks growth will come in this year at 1.6%, which is above the consensus, with most of the slowdown being delayed until later in the year when rising inflation really begins to bite into the growth in real incomes.
We shall see. Economists do not get everything right but they do a lot better than they are usually given credit for. Apart from the expected slowdown in growth – the consensus is for 1% to 1.5% this year – most forecasters do not see any significant improvement in Britain’s Achilles heel, the current account, with the average prediction a deficit of over £80bn. The public finances, meanwhile, will improve only at a snail’s pace, from £70bn this year, 2016-17, to £66bn in 2017-18, limiting any room for the manoeuvre for the government.
Though slower growth and higher inflation is predicted for Britain, we start 2017 amid more optimism about the global economy than for some time, particularly in financial markets, and certainly a lot more than this time last year, when George Osborne was warning of a “dangerous cocktail” of risks. The fact that quite a few of those hopes rest on the Trump presidency should perhaps make us a little wary. What, after all, could possibly go wrong?