Sunday, December 27, 2020
A dire year for the economy - and for forecasters
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt.

The forecasting league table referred to in this piece is also available alongside my column on www.thetimes.co.uk

This extraordinary year is ending with as much to be worried about as at any time during it. People like me often bandy around words like uncertainty but in normal times, there is nothing like the doubt that we are experiencing at the moment. We worry about the health implications of the new Covid-19 strain, and we worry about the economic implications.

The Brexit deal finalised on Christmas Eve was better than a catastrophic no-deal and should be welcomed for that. But businesses were exasperated and damaged by its last-minute nature. There will still be disruption. And the adverse effects of this narrow deal will occur over the medium and long-term.

This has been a year of extraordinary numbers, including the worst-in-300-years recession which will see gross domestic product (GDP) fall by around 11%, and some quarterly lurches, the likes of which I hope will prove to be a one-of; down nearly 19% in April-June, and up 16% in a July-September period for which I am already feeling nostalgia.

To set this years 11% fall in context, it is roughly equivalent to the sum of annual growth rates for the previous six years. This years budget deficit, put at nearly 400bn by the official forecaster, is equivalent to more than the previous six years combined.

Rishi Sunak has set himself two dates for 2021. The first is March 3, when he hopes to deliver his second budget, a year after his first. The second is the end of April when, on current plans, the furlough scheme is due to start being wound down. That suggests a budget while the labour market still requires significant government support. At one time or another the government has directly supported more than 12.5m jobs, including the self-employed.

Before coming on to my forecasting league table brace yourself a couple of honourable mentions from me for what they have done this year. David Owen and his colleagues at the investment bank Jefferies International, were quicker than anybody at using informal indicators to track the economy during the course of the Covid-19 crisis. His assessment of what was likely to happen to gross domestic product (GDP) during the first crucial lockdown phase and the third quarter recovery was remarkably accurate.

Id also mention Howard Archer of the EY Item Club, not so much for his forecast, but for his tireless monitoring of the data. Not a day goes by without him picking up on and analysing new statistical information on the economy and it is extremely useful.

I should also single out the Office for National Statistics (ONS), which provides much of that data. It has adapted what it does, providing timelier indicators on both the economy and the course of the pandemic, in very difficult circumstances. It has dome a great job, and I can even forgive it releasing important statistics at 7 am.

Now to the forecasts. I did consider scrapping the league table this year but it is a tradition that stretches back a quarter of a century, and I did not want to break the sequence. We have had, as the former chairman of the Office for Budget Responsibility said, two once in a lifetime shocks in the space of little more than 10 years.

The financial crisis was kinder to forecasters than Covid-19, at least as far as my competition is concerned. It was clear by January 2009 that something terrible was amiss. In contrast, nobody in the UK knew about the coronavirus when economists prepared their forecasts for publication in January this year. Even when the news began to emerge it was not clear how big the impact would be. As late as March, economist were still on average expecting some growth this year and even in April, the average forecast for this years GDP decline was less than 6%, about half the likely outturn.

Normally, under my scoring system, most forecasters score seven, eight or nine out of 10. This year, even with some generous amendments to the system, it is no disgrace to have scored zero or one. A big negative economic shock came along, the timing of which nobody could have reasonably foreseen.

The best forecasts, in that context, were the gloomiest, though nobody got close to being gloomy enough. Top of my league table were the economists at Bank of America/Merrill Lynch, who were downbeat on growth, unemployment and interest rates. They would be the first to concede that it was something of a Pyrrhic victory, though in this game you take any wins that you can.

Next week I shall look forward to 2021. A decent recovery is generally expected. The question is how much of a shadow will be cast by the very gloomy end to 2020. And whether the world has more nasty surprises in store.