Sunday, December 30, 2018
A good year for 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 to accompny this article is also in The Sunday Times.

So we get ready to say goodbye to a year that, in the end, was a disappointing one. Much of that disappointment relates to the global economy. Back in January it was possible to look at a world economy firing on all cylinders, with strong growth in North America, Asia, the emerging world and, most surprisingly, Europe.

It appeared, at long last, that the world was shaking off the doleful influence of the financial crisis, and that the hangovers, financial and fiscal, had finally gone away. A couple of years of global growth very close to the pre-crisis norm of 4%, with world trade also on the up, appeared to be in prospect.

Sadly, it has not turned out like that. Growth has not collapsed but it has disappointed, closer to 3.5% rather than 4%. We end the year with worries on the increase and the optimism of a year ago taking a back seat. Countries most exposed to world trade, such as Germany, have been caught in the downdraft, ending the year with growth slowing and business confidence weak,

As Charles Dumas of T S Lombard put it in a recent report: “The global slowdown seems to have started in mid-2018, and shows the now decisive importance of emerging markets to the world economy. China and other emerging markets account for 40% of world GDP and their slowdown led to a sharp mid-year reduction in world trade growth … In Europe, export dependence led to a negative third quarter GDP change in Germany and Italy.”

Why the disappointment? High on the agenda are two separate developments in America; Donald Trump’s trade wars and the decision by the Federal Reserve, America’s central bank, to raise interest rates four times during the year, with the last coming earlier this month.

Trump’s tariffs, initially on steel and aluminium but then extending into a more general trade war with China, nipped in the bud a promising recovery in world trade. And, as economists warned, protectionism turned out to be bad for growth.

The Fed, which felt emboldened enough to raise rates for the ninth time since the crisis, and at a faster pace than before, attracted Trump’s ire. But, in its efforts to keep US inflation under control, was also in the vanguard of what was a significant monetary policy reversal. After years of stimulus, via ultra low interest rates and quantitative easing (QE), central banks shifted into reverse gear. Even the European Central Bank ended its QE.

What about Britain? Economic forecasters would be the first to acknowledge that they have good years and bad ones. Most had a couple of bad years around the time of the financial crisis, mainly because even when it was under way, they underestimated how bad its impact on growth would be.

The referendum, in contrast, was expected to have a bigger short-term negative effect on growth than turned out to be the case, although the broad impact on the economy of Britain’s vote to leave over the past 2˝ years has turned out close to expectations.

2018 was one of the good years for forecasters. Though the world economy turned out to be a touch disappointing, predictions of UK growth were downbeat, and were right to be so. At an estimated 1.4%, the current consensus, growth was very close to what was expected by the majority of forecasters at the beginning of the year.

Growth was expected to be disappointing, and it has been, ranking as the weakest year since the crisis. Though we have to wait a little while for the final figures – and even then they are subject to revision – the economy struggled.

The story of the economy was one of Brexit - and again there was more optimism on that a year ago than there is now - and of other more traditional factors. The Beast from the East which ended the winter hit growth quite hard, while the hot summer and a surprising World Cup showing from the England team enhanced the bounce in the third. The fourth quarter looks to have seen a return to the very slow growth of earlier in the year; just 0.1% or 0.2%.

Economists mainly got growth right and they were also correct in anticipating a fall in inflation, as the effects of sterling’s sharp post-referendum fall pass through. Inflation was 3% at the end of last year and was down to 2.3% last month.

That has meant, with a strengthening of wage growth to its best in 10 years, a crossover between earnings and inflation, so resuming real wage growth, currently around 1%. This was not enough, however, to rescue a grim year for retailers who, despite a Black Friday boost in November, have found 2018 to be the toughest year in a long time,

The labour market performed well in another respect, with continued if slightly slower growth in employment, and a further drop in unemployment. The 4% unemployment rate seen during the year was the lowest for decades.

What else happened? The Bank of England raised interest rates, taking Bank rate to 0.75%, and thus br4eaking above 0.5% for the first time since March 2009. Philip Hammond took advantage of some favourable forecast revisions from the Office for Budget Responsibility to fund the National Health Service’s 70th birthday present and a cut in income tax via raising the personal allowance. But a change in the treatment of student loans by official statisticians will add significantly to the measured budget deficit.

So who got closest to the story of 2018 with their forecasts? I am pleased to announce that we got two perfect tens this year on my scoring system, two forecasters who got growth, inflation, unemployment, the balance of payments and interest rates as close to completely correct as it is possible to be.

One was Pantheon Macroeconomics, in the form of its chief UK economist Samuel Tombs. His tone about Britain’s economy has been downbeat since the referendum and in 2018 he called it correctly. Congratulations to him.

It is also pleasing to record that the Office for Budget Responsibility (OBR), the government’s fiscal and forecasting watchdog, which has a huge influence in framing others’ forecasts for the economy, also did very well, again scoring 10 out of 10. For the OBR this will be somewhat bitter-sweet. It would be the first to admit that its forecasts for public borrowing, one of its main functions, have been too pessimistic over the past couple of years. A recognition of that enabled Hammond to splash the cash in November. Government borrowing has never been one of the measures I have used to judge the forecasts, however, because the time to do that is after the end of the fiscal year in April, not at the end of the calendar year.

It is only fair to report that many other forecasters did well this year, the number of eight and nine scores being higher than on average. Economic forecasting comes in for a lot of flak, but it did well in 2018.

At the other end of the scale to Tombs and the OBR sits the Liverpool Marco Research Group of Patrick Minford, now a professor at Cardiff University but previously at Liverpool. He is perhaps the most prominent Brexit-supporting economist. Optimism on the impact of the referendum vote did not serve him well this year or, it should be said, in 2017.