Thursday, 31 December 2020

Marking myself to market: my forecasts for 2020, 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.  This year, of course, is different.  The FT headline on New Year’s Day last year was “Economists predict little change in growth for 2020”.  And the summary was: 

“Any bounce that the UK economy received from Boris Johnson’s decisive election victory would swiftly fizzle out in 2020 as the uncertainties from Brexit continue to curb business investment, according to the FT’s annual survey of more than 85 leading economists. The vast majority of those polled predicted there would be little or no improvement in economic growth this year as chronically weak productivity persists and Britain’s future trading relationship with the EU remains unknown.”

Nothing wrong with this in its own terms. Indeed, given the number of political commentators and journalists (not to mention politicians) who predicted a “Boris bounce”, this suggests that we economists do indeed know what we’re doing, at least when it comes to analysis of the short-term economic impact of social and political events.

Not, however, when it comes to crises. Economists were rightly criticised for our failures in the run-up to the financial crisis of 2008-09 – although, in my view, the valid critique was not of our failure to forecast the crisis but much deeper failures of analysis of the factors that led to it. Nobody is criticising us for not forecasting the pandemic, and therefore (a little light mockery aside) no one is paying much attention to the fact that our forecasts for GDP, unemployment etc in 2020 have no resemblance to what actually happened.

I actually think economists and economics have performed relatively well during the covid-19 pandemic – better than in 2008-09 and its aftermath, and better than I would have expected. But that’s a topic for another blog. Meanwhile, for the record and for future comparisons, here are my predictions from last year. The FT economists’ survey for 2021 will be published early in the New Year, as usual.

Q1. Will the UK see a "Boris bounce" in growth in 2020 - and how long will any improvement last? 

"There may be some post-election boost to consumer confidence and perhaps house prices. But Brexit uncertainty, combined with global economic weakness, will continue to overhang the economy; there is no reason to expect a big upsurge in business investment, given that the UK faces another possible cliff-edge in terms of its trading relationship with the EU in December 2020.  The UK economy will continue to stagnate with only modest growth (and the risks are to the downside)."

EvaluationPre-covid, this was correct; there was no “Boris bounce” and the UK economy was flat in the first quarter of 2020.

Q2. To what extent will fiscal stimulus support the economy in 2020 and beyond?

"To a limited extent; the deficit will rise, both because of lower revenues and discretionary spending increases, but the macroeconomic impact will be modest. However, if there is a more severe downturn, the government will introduce further discretionary stimulus."

Evaluation: Correct and indeed hugely understated! But I got the main point - the government would not repeat the errors of 2010.

 Q3.     Will households feel better or worse off at the end of 2020

 "Wage growth is likely to slow somewhat, so not much better off."

EvaluationAlso technically correct. In fact wage growth as measured by average earnings has indeed slowed only slightly despite covid. 

Q4.  What should the new Bank of England governor change in the conduct of monetary policy? 

"After 10 years of ultra-low interest rates it is past time for a thorough review of the Banks’ mandate – both the exclusive focus on inflation and the level of the target, as well as the wider relationship with fiscal policy. Obviously the Bank cannot and should not lead such a review but it – and especially the Governor – will have an important role to play."

EvaluationNothing much has happened here although there may be an opportunity post-pandemic to look again at these issues.

Q5.  Optional quantitative question - what do you expect for GDP, interest rates, wage growth out of the following options - much higher/a little higher/no change/a little lower/much lower

GDP growth :  a little lower

Interest rates:  no change

Wage growth: a little lower

Evaluation: nul points!

Q6. Is there anything else you would like to tell us?

"Yes, I'm a bit worried about this bat flu in China. " 

Just kidding. I'm not Dominic Cummings. In fact I wrote this: 

 "Last year I said that een abstracting fromv 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. 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. I stand by this."

Evaluation: I still stand by this!