Sunday, December 31, 2017
How jobs and interest rates surprised the forecasters
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

The table accompanying this piece, which is essential, can be accessed on the Sunday Times website,and in the newspaper.

So what kind of year was it? A good one for the global economy, with increasingly broad-based growth and a sense that the deadly grip of the financial crisis was starting to ease. For Britain, it was a year dominated by Brexit, as was always inevitable. We have not seen the last of these years.

A year ago my annual forecasting league table, a staple of the economic calendar, caused controversy because it showed that forecasters had a good year in terms of predicting the economic numbers, even though most of them did not anticipate the biggest development in 2016, the vote to leave the European Union.

This time there was no such problem. Forecasters knew what was coming in 2017 and in that context many of the forecasts were very good. The consensus at the start of year was a little low on both growth and inflation, though not decisively so.

I should say that we do not know precisely what growth in 2017 will have been, and even when we do the figures will be prone to revision. I have estimated 1.7%, following the release of the third quarter national accounts just before Christmas. But 2017’s growth could have been higher or lower than this.

The same applies to the balance of payments, where again we only have three quarters of current account data but my number, a rather eyewatering deficit of £90bn, will be close to the eventual outturn.

Inflation is easier. The figures do not get revised and we know that consumer price inflation was 3% in October and 3.1% in November.

That brings me on to the two biggest surprises, for forecasters looking ahead early this year, as far as the economy was concerned. The first was interest rates, for which I have sympathy with the forecasters.

At the start of the year the Bank of England had passed up on its earlier hints about a second post-referendum cut in interest rates in November 2016, but a further rate reduction still appeared to be on the cards. That and the fact that we were approaching the 10th anniversary of the last hike in rates meant that no change was the safest forecast at the start of the year. The tiny number of forecasters who did predict a rate rise are to be congratulated, though in most cases they expected growth in the economy to be significantly stronger than it was.

The surprise was that the Bank raised rates against a backdrop of weak growth. The justification was that weaker growth may be as good as it gets for some time. I shall take a look at prospects for interest rates in 2018 next week, along with other aspects of the outlook.

The other big surprise was unemployment and again this consisted of two parts. One was that the economy was not expected to be strong enough to generate much of an increase in employment, and thus a fall in unemployment. The other was the expectation, not for the first time, that stronger productivity would kick in, if only against the backdrop of weak growth. There was indeed a glimmer of light on productivity this year, but not much.

So unemployment fell to a 40-year low, and most forecasters did not see it coming. There was a time when the labour market was very easy to forecast. In recent years it has not been.

So who steered a successful forecasting course through this tricky year? The winner, and he is developing a reputation for this kind of thing, is Alan Clarke of Scotiabank. Scotiabank is a Canadian bank which, as its name suggests, hails originally from Nova Scotia, where it was founded nearly 200 years ago. As well as operating in London, it is active across the Americas and in Asia.

Though Clarke did not quite get the extent of the unemployment fall, or the rate rise, his other forecasts were very good. And when I say he is developing a reputation, last year he finished joint first with Daiwa Capital Markets. In the long history of the forecasting league table I cannot recall anybody winning twice in a row before. So many congratulations are in order.

His predictions will be worth watching in 2018. As things stand they are for 1.5% growth, and a low 1.8% inflation by the end of the year, in spite of which he expects a rise in Bank rate from its current 0.5% to 1%. Daiwa, by the way, had another creditable year, coming in sixth.

Most of the top forecasters this year are from the City, which is not unusual. They tend to update their forecasts more frequently than official forecasters, embracing new data. Some of the official and semi-official forecasters, like the IMF, OECD and European Commission put themselves at a disadvantage by not forecasting all the variables I use in the comparison.

The Office for Budget Responsibility, which does not offer an interest rate prediction (neither did the Treasury when it did the official forecast) had a middling year. Its forecasts – last updated the previous November - were too low for both growth and inflation. The Bank does not feature because its forecasts are not included in the Treasury’s monthly compilation of independent forecasts.

All in all, not a bad year for forecasters. In 2017 the economy was not as bad as the pessimists feared and not as good as the optimists hoped. Roll on 2018.