AN EXPERT’S MEA CULPA IS WELL-TIMED…NOW LET’S MOVE ON
As Britain prepares to start its first full week of work of 2017 after the four-day warm-up following the New Year celebrations, there is a strong feeling that we are still in a phoney war and that the full drama of this year has yet to begin.
President-elect Donald Trump does not starting wearing the cloak of power until 20th January and the much-awaited start of Britain’s exit from the European Union may not happen for another 11 weeks.
Yet one thing is clear - much to US Democrats’ and British Remainers’ consternation - and that that is the economies on both sides of the Atlantic are doing very well despite forecasts that the election of the billionaire warmonger and the triumph of the Brexiteers would lead to immediate carnage.
In fact the opposite is true. According to official figures the UK economy grew by 0.6% in the three months from July to September that followed the 23th June Brexit vote. Car sales are close to record highs, house prices are rising, the FTSE-100 stock index has hit a record high, and Britons are borrowing like billy-o.
Growth in the United States is even stronger and there is a similar pattern of positive news on the employment and housing market.
The fault was not the forecasts but their precision and the certainty with which they were expressed
It was not meant to happen like this, or at least according to some of the forecasts that came out during the poisonous Brexit referendum debate. The one that stands out now is the Treasury’s forecast of May 2016.
It stated baldly: “A vote to leave would cause an immediate and profound economic shock creating instability and uncertainty which would be compounded by the complex and interdependent negotiations that would follow. The central conclusion of the analysis is that the effect of this profound shock would be to push the UK into recession and lead to a sharp rise in unemployment.”
It then got more specific saying that its “central estimate” that gross domestic product (GDP) would be £4,300 lower in 2015 terms for each household after 15 years and every year thereafter.”
Of course, we don’t know what will happen in 15 years - and actually that might very well happen - but the figure was perfect for political press conferences and media headlines. In retrospect it looks just a little too precise.
The Bank of England was not far behind with Governor Mark Carney saying in the same month that Britain could slide into recession in the aftermath of a vote to leave the EU in the following month’s referendum.
“A vote to leave the EU could have material economic effects - on the exchange rate, on demand and on the economy’s supply potential - that could affect the appropriate setting of monetary policy,” Carney told a news conference. He followed this up with a quarter-point interest rate cut and £70bn of quantitative easing on 4 August, saying that the UK was likely to see “little growth” in the second half of 2016.
The fault was not the forecasts but their precision and the certainty with which they were expressed - something that economists know, or should know, is not inherent to their profession.
Finally after allowing a succession of politicians such as Iain Duncan Smith, Jacob Rees-Mogg and Michael Gove to make not just personal attacks on Carney but wider diatribes against “experts”, the Bank’s chief economist Andy Haldane has sought to bring some much-needed realism to the debate.
In a widely reported speech at the Institute for Government, he castigated the profession for failing to forecast the 2008 financial crisis - something he amusingly described as its “Michael Fish moment” when the weatherman dismissed talk of a hurricane in 1987 - because economic models were ill-equipped to making sense of behaviours that were deeply irrational. In other words, people to do not behave like hyper-rational automatons so beloved of the traditional economics community.
But he went on to admit that the bank did not anticipate the resilience of consumer spending after Britain voted to leave the EU. But while the bank had been wrong about timing it was still right about the fundamentals, and that Brexit was still likely to harm growth.
it may be some time until we can say with confidence that economists were right all along
The economics profession has a clear opportunity to make two vital points. The first is to echo that mea culpa and say that, yes it was wrong to be so precise and definite, but insist that by using billions of data points from the past it can make a pretty good estimate about the future.
The second is to embrace the growing popularity of the movement to change the way that economics is taught so that it moves away from the rational individual assumption and embraces disciplines such as psychology, sociology and behavioural science. The CORE project is a good example.
Economics still has a lot to say and particularly about the microeconomics of how business, consumers, savers and investors operate as well as the sexier macroeconomics.
The good news is that the profession still had some level of self-confidence. The annual survey of economists by the Financial Times (disclaimer: I contributed) was clear in its message that three-quarters of economists surveyed in the annual FT poll thought Brexit would harm Britain’s medium-term economic prospects, nine times more than those who thought it would improve the outlook.
Unless the laws of economics have been rewritten, the strong performance of the UK economy post-Brexit is pain deferred rather than pain averted. Since Brexit does not even begin until 31 March it may be some time until we can say with confidence that economists were right all along. In the meantime - Happy New Year!
About the author
Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.
Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.
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