Economic forecasts - how did they do?

"The only function of economic forecasting is to make astrology look respectable" the famous economist John Kenneth Galbraith once proclaimed. Indeed, this perception has only ever increased since the profession's failure to anticipate and predict the global financial crisis of 2007/8, as well as underestimating its aftermath.

In Britain, the failure of economic forecasting world was once again in the limelight following the EU referendum vote on the 23 June 2016 - principally the surprisingly politicised Treasury prediction that a vote to leave the EU would "push our economy into a recession and lead to an increase in unemployment of around 500,000, GDP would be 3.6% smaller, average real wages would be lower, inflation higher, sterling weaker, house prices would be hit and public borrowing would rise compared with a vote to remain." There was a consensus among economic forecasters that leaving the EU would cause a recession.

However, such pessimism surrounding economic forecasters might be misguided. Typically, criticism attributed to them ignore that their forecasts change when information changes. Indeed, most of them changed their view from a recession to a long-term dampening of growth - post-Brexit growth forecasts, in Britain, have been rather accurate. The most optimistic forecaster, the Economists for Free Trade, have been the most inaccurate in their forecasts overestimating GDP growth by 1.85% of GDP in Q1 2018.

David Smith, in today's Sunday Times, analysed forecasters' opinions for 2018 - most did very well - and it is a reminder that there are more economic forecasts than GDP growth. His analysis is summarised in the figures below. The worst was the Patrick Minford's Liverpool Research Group, who co-founded the Economists for Free Trade.

What is crucial, however, is not the figure per se. And it should, of course, be noted that past performance does not guarantee future performance. The methodology, direction of prediction and the accompanying commentary of professional forecasters matter most. It explains their rationale, and how sudden shocks to the economy would be interpreted by their model. The economy is fluid and dynamic, just like forecasts and economists.

https://www.thetimes.co.uk/article/david-smith-a-downbeat-year-but-not-for-the-forecasters-r79rqhpjm

https://www.thetimes.co.uk/article/david-smith-a-downbeat-year-but-not-for-the-forecasters-r79rqhpjm

For what it's worth, I think 2019 will bring more subdued economic growth to the UK. This is based on the belief that Theresa May will not be able to pass her withdrawal agreement in Parliament, increasing the chances of a no-deal Brexit and a second referendum more likely. Both of these options create and embed uncertainty in the UK economy, reducing investment and harming the exchange rate. The fall in the exchange rate should help exporters, but it will only reduce the dampening of economic growth not mitigate against it. It will also cause a rise in inflation. Consumption, the largest component of the economy, will also be hit.


There are, of course, international influences that we have no control over. America's stock market has taken a beating recently, and this could have spillover effects in the UK economy. America's trade war with China might renew once again after the 90-day truce, reducing global economic growth. Emerging markets might be hit by the expected increases in American interests rates. Quantitative tightening around the world will likely subdue asset valuations and economic growth. The list is endless.