Sunday, December 29, 2019
Forecasters were too upbeat on growth but too gloomy on jobs
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 accompany this piece is also in the Sunday Times.

The moment has nearly arrived, not just the end of the year but the end of the 2010s decade. Nobody has yet come up with a good name for this decade, which was never roaring though probably was a long period of convalescence from the financial crisis.

Before coming on to 2019, and how economic forecasters did or did not do, a few statistics from the decade now ending. Growth, assuming a 1.3% outturn for 2019, will on currently available figures have averaged 1.8% during the decade, with the strongest period in the middle.

That 1.8% average, curiously enough, is exactly the same as in the 2000s, strong 2.9% average growth to 2007 being dragged down by the deep recession of 2008-9. For other decades the figures are 1990s 2.2%, 1980s 2.7% and 1970s 2.6%. In the golden age for the world economy of the 1950s and 1960s, growth averaged 3.2% and 3.5% respectively.

Inflation has averaged 2.2% over the past decade, a touch above the official 2% target, despite two separate bouts of sterling weakness which push up import prices and therefore inflation, including a period at 5% in 2011. There was a time when some expected the ultra-easy policies pursued by central banks to lead to very high inflation, failing to recognise that they were done in order to compensate for post-crisis monetary weakness.

The unemployment rate averaged 6.1% in the 2010s, having hit a peak of 8.5% in the wake of the crisis, and could have been very much worse. At the end of the decade, the unemployment rate is just 3.8%, the lowest for 45 years.

What about 2019? The outcome was a curious one for economic forecasters. Most were too optimistic on economic growth, which came in lower than they expected, while too pessimistic on unemployment, which they thought would be higher than it turned out to be. The error was due to an expectation, which was not delivered, that productivity would begin to recover, instead of which it has fallen. Even slow growth without productivity means more people in work.

Forecasters also generally expected inflation to be higher than it has turned out to be. Most forecasts made a year ago were for inflation to end the year closer to 2% than 1.5%. The difference is small, but it matters.

Many also got it wrong on interest rates. This time last year, central banks appeared to be in tightening mode. America’s Federal Reserve signalled that more rate hikes were on the way, while the European Central Bank had halted its programme of quantitative easing (QE). It has not turned out like that. The Fed has instead cut rates and the ECB resumed QE.

Two things have complicated things for forecasters, though the majority got close to the eventual outcome. The big domestic uncertainty was Brexit, and the timing of it.

Most thought that the initial leaving date, March 29, would be honoured. With the first phase of Brexit completed, the Bank would be free to get on with its declared aim of “gradual and limited” interest rate rises. It did not happen. The UK was still in the EU after March 29, and after October 31. Whether this weakened growth, or just made it more volatile between the different quarters of the year, can be debated. There were fears in the run-up to both these possible leaving dates of a no-deal Brexit.

The other big change was for the world economy, hence the about-turns on monetary policy from central banks. 2019 will have been the weakest year for the global economy since 2009, the height of the crisis, with growth of 3% at best. Instead of reining back his rhetoric and the trade war with China, Donald Trump ramped it up. The year has ended with both sides seeking to dial down on a trade war that has the potential to harm them both further, but damage has already been done.

Who navigated their way best through these uncertainties? First, let me supply the usual health warning. There is no perfect way of judging forecasts. Some of the information that goes into making this judgment will not change. Inflation and unemployment figures are not revised and we know what the level of Bank rate is.

But growth figures are subject to revision, often for many years to come, and my estimate for the current account (balance of payments) deficit, £90bn, is an extrapolation based on the first three quarters of the year and a narrowing trend. £90bn is also close to the current forecasting consensus for the deficit, as is 1.3% for 2019’s growth. It marks the second year in succession that growth has been at 1.3%, both the weakest since the crisis. Forecasters who were more upbeat mainly expected a pick-up in business investment when uncertainty lifted.

The key to getting the economy right in 2019, for forecasters, was to predict both low growth and low inflation, and to judge that this combination was not one which would encourage the Bank to raise interest rates, despite its apparent appetite for doing so this time last year.

Six forecasters did very well, scoring eight out of 10, and had to be separated by the league table’s equivalent of goa; difference. The top three were the corporate or financial market divisions of three of Britain’s high street banks; Santander, HSBC and Natwest Markets, part of Royal Bank of Scotland. Three others who have done well over the years, Schroders Investment Management, Daiwa Capital Markets and Pantheon Macroeconomics – last year’s winners alongside the Office for Budget responsibility – did very well again.

There has to be a winner, and the top slot goes to Santander, and the team led by Stuart Green, its chief economist. The Santander forecast was close and could have been even closer, but for a couple of near misses on two of the other forecast variables. Congratulations.

And, while it is easy to knock forecasters, as I say most did pretty well in 2019. Let us see how they do next year.

That will depend on a range of factors, including the extent of any pick-up in growth in the world economy, on the assumption that Trump will want a strong US economy to help his re-election bid. There is also the question of whether a more stable political environment in Britain, together with greater certainty over Brexit and the public spending boost provide by Sajid Javid, the chancellor, will lift growth. Those are questions for next week and beyond, when we will be in a new year and, of course, a new decade.