Thursday 20 December 2018

Marking myself to market: my forecasts for 2018, evaluated

Every year the Financial Times asks, just before Christmas, 100-odd UK economists for their predictions for the year to come.  And in recent years, in the spirit of Brad Delong’s call for economists to “mark their beliefs to market”, I’ve looked back at what I said last year.  Overall, I don’t think I did too badly – and nor did my colleagues, collectively, with the FT’s summary of our views not being far off what actually happened:

The UK’s economy will slow further in 2018 as business investment remains on hold, interest rates creep up and indebted consumers curb their spending, according to more than 100 leading economists. The majority of economists who took part in the Financial Times annual predictions survey agreed that inflation would start to recede this year, after last year correctly forecasting it would rise sharply. However, after wrongly predicting that interest rates would remain frozen in 2017, economists believe there will be a further 0.5 percentage point rise this year. The UK was one of the fastest growing advanced economies in 2016 but dropped below all other G7 economies in 2017 and is expected to remain towards the back of the pack this year, with Japan and Italy.

Here are my detailed responses from December 2017 (the whole FT survey is here) with some ex post self-assessment. 
1. Economic prospects
How fast do you think the UK economy will grow in 2018 and how will this compare to other countries?  Please explain your answer

The UK economy has slowed considerably with respect to other countries, and I would expect this period of relatively sluggish growth to continue.  Brexit-related uncertainty will persist, which will reduce business and perhaps consumer confidence.  Meanwhile, the labour market will slow, and net migration will continue to fall, reducing labour supply and hence potential growth.  However, if world growth continues to be relatively strong, this will help UK exports and manufacturing, and the impact of the sharp fall in the exchange rate post-Brexit will dissipate.

Assessment: Broadly accurate overall, although slightly too pessimistic with respect to the labour market, and exports have not performed as well as I hoped.

2. Brexit
Compared to what you thought 12 months ago about the UK's long-term economic prospects outside the EU, are you now more optimistic or more pessimistic than you were? Please explain your answer

My central expectation hasn’t changed much, but the variance has increased significantly, because of political events.  It is now considerably more likely that trading arrangements between the UK and EU will remain more or less unchanged until at least 2021 and possibly thereafter, while the possibility of the UK remaining in the EU, while still unlikely, is no longer completely implausible.  Such scenarios would be considerably more benign than I expected last year.  At the same time the risk of a chaotic or disorderly Brexit has not gone away, and the government has shown itself completely incapable of agreeing, let alone implementing, a coherent strategy for the Brexit negotiations, which gives little comfort that they are capable of negotiating a future arrangement with the EU that is in the UK’s economic interests.  So the downside risks have also, if anything, increased.  Right now, anyone who gives a point estimate for the economic impact of Brexit should not be taken too seriously..

Assessment: Hard to argue with this in broad terms, but since this was explicitly about the long-term, we don’t really know. The last sentence still applies.

3. Outlook for consumers
In 2017, consumers' finances were squeezed by rapidly rising prices. Will 2018 be an easier year for UK households and what are the implications for consumer spending?

The impact of exchange rate changes will dissipate, but wage growth will remain subdued by historical standards, and the labour market may weaken somewhat (in the most likely scenario – there are clearly significant risks).  So consumers may have it somewhat easier than this year, but there’s no prospect of a spending boom.

Assessment: As above, a bit too pessimistic about the labour market, but broadly right about the implications for consumer spending.

4. Wages
With unemployment at a 40-year low, how much of a pay rise will British workers get in 2018? Please explain your answer

See above – in the most likely scenario, somewhat more than they got this year (which was basically nothing!) because of the fall in inflation, but nominal wage growth will still remain fairly low by historical standards.

Assessment: Accurate. Despite the hype about the “fastest wage growth in a decade” resulting from the ONS’ misleading focus on nominal wages, real wage growth of 1% of so is nothing to get excited above.

5. Monetary policy
How far will the Bank of England raise interest rates next year? Do you think they should? Please explain your answer

Perhaps to 1% by the end of the year if things go reasonably well in the Brexit negotiations, but they could easily get stuck at 0.75%.

Assessment: Correct.

6. Productivity
Will the UK experience a resurgence of productivity growth in 2018? Please explain your answer

Looking at productivity quarter to quarter or even year on year isn’t very illuminating – a sharp recession and labour market shakeout might easily raise observed productivity. The question is really whether we can break the post-2008 trend of very low/no productivity growth and return to the 1973 to 2008 one of 2% a year or so.  And we won’t know that in 2018.  More broadly, since we don’t fully understand the post-2008 slowdown, it is very difficult to say what will reverse it, but so far there is no indication that current policies or trends will do so.  The UK could have used the long period of historically very low interest rates to boost investment in productivity-enhancing infrastructure and in housing, but chose do the opposite. While the government has made some tentative moves towards reversing this, they will take a long time to bear fruit. 

Assessment: I wouldn’t change this.