Monday 23 December 2019

Marking myself to market: my forecasts for 2019, 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.  
First, however, it’s worth noting that the collective views of the economists surveyed were, as in the previous year, pretty accurate. The FT survey, unsurprisingly, reflects the overwhelming consensus amongst UK economists that the Brexit vote has already and will continue to be a drag on UK economic growth for the foreseeable future. Here’s the FT’s summary of our views:
“Uncertainty will hobble UK business investment and depress consumer spending in 2019, stunting long-term growth even if Britain manages to avoid a disorderly Brexit, according to a poll of more than 80 leading economists. The best the UK can expect over the year is uninspiring growth remaining at its current level of about 1.5 per cent, even if the economy eventually enjoys a modest rebound on the back of a deal with the EU, the FT’s annual survey on the UK’s economic outlook suggests.” 

Our collective pessimism continues to be vindicated: based on the data so far, this is a pretty good summary of 2019.  

So here are my detailed responses from December 2018 (the whole FT survey is here) with some ex post self-assessment.

To what extent will Brexit-related uncertainty in the first quarter of the year affect the UK economy?

"Brexit-related uncertainty has already affected the economy, with essentially no growth during the past few months; we may already be in recession. I would expect — absent a speedy resolution which seems unlikely — the impacts to spread from large businesses to consumers and business more generally."

Assessment: My response was very much consistent with that of others; and with what actually happened. While there have been ups and downs in measured growth (see next answer) as a result of stockpiling, the underlying picture is of weakness, partly driven by Brexit uncertainty, partly by wider factors.

How will Brexit affect the UK economy over the course of 2019?

"Assuming the worst-case (chaotic no deal) outcome does not materialise, uncertainty is likely to continue. That is, either Article 50 is extended or some version of the current deal is accepted, neither of which resolves the medium to long-term issues, but the current threat of a cliff-edge on March 29 is removed. This should improve confidence in the short term, but Brexit will continue to weigh on business investment for the foreseeable future. So while there might be a “relief bounce”, I wouldn’t expect a substantial “deal dividend”. No deal would almost certainly lead to a severe recession, although uncertainties are huge."

Assessment: This is accurate to date, although we don’t know yet if there will in fact be the claimed “deal dividend” (my answer to this year’s survey says much the same thing).  We don’t know what would have happened in the event of No deal.

After a long squeeze, real wages are finally rising. Will households feel better off at the end of 2019?

"Since the Brexit referendum, real wages have risen by just over 1 per cent; in the two years before the referendum they rose by about 3.5 per cent. From the 1950s to 2008, they typically rose 1.5 per cent or so annually. So by any standards, real wage growth remains anaemic, particularly given low unemployment. Given Brexit uncertainties, as well as the slowing global outlook, I wouldn’t expect real wage growth to be particularly impressive by historical standards any time soon."

Assessment: Real wages grew by about 1.5% in 2019.  Certainly not impressive by historical standards, although perhaps slightly better than I expected; but they may now be slowing.

How far will the government act in 2019 on its promise to end austerity?

"The test of whether the government has made good its promise will be whether we see a real reversal in the rise in rough sleeping, demand for food banks, NHS waiting times and so on; levels of hardship for the most vulnerable in our society that would have been almost unimaginable a decade ago. My prediction would be that, assuming no change of government, we will see some rhetoric but little action: the government may reduce the scale of future cuts to some services, but will do very little to restore the very large and damaging cuts to disability and family benefits, social care, legal aid, justice, prisons and so on."

Assessment: Entirely accurate, unfortunately.

How will monetary policy change in 2019? Do you think the Bank of England will get it right?

"Obviously, this too depends on Brexit, but I think that as the economy weakens the bank will (rightly) be reluctant to raise rates quickly. If there is a short-term fix other than no deal, rates might rise by 0.25bp or 0.5bp, but still remain at historically very low levels. In a chaotic no-deal scenario, I think it’s highly implausible that the bank would raise rates."

Assessment: Correct.

Would you like to tell us anything else?

"Short-term economic forecasts for the UK are currently contingent on short-term political forecasts about Brexit. And as William Goldman (who died a few weeks ago) said, “nobody knows anything”. But, even abstracting from Brexit, the UK economy, like the global economy, is not in great shape. While overall inequality has been relatively stable (although may now be rising), levels of deprivation are a disgrace for a relatively rich, advanced developed economy. By prioritising short-term deficit reduction (in some cases via transparent accounting fiddles, as with the student loans fiasco, now reversed by ONS) over long-term sustainability, the government has left a poisonous legacy for anyone, from whatever party, who wants to be honest with the public about fiscal choices. The flexible labour market (largely a legacy of policy choices from the mid-1980s on) has delivered close to “full employment” but the current model is clearly not sustainable. And we are no closer to working out how to overcome the chronic short-termism of British business and government. Other than that, everything is fine. Happy New Year."

I stand by all this.

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