Don't be scared by economic forecasting
The Bank of England warned last week the UK will tip into recession this year. But predictions about stockmarkets, earnings or macroeconomic trends can be safely ignored, says Andrew Van Sickle.
“The only function of economic forecasting is to make astrology look respectable,” said JK Galbraith. Predictions about stockmarkets, earnings or macroeconomic trends can be safely ignored, especially if you are a picky Virgo like me. That is why we haven’t been too fazed by the Bank of England’s forecast of a 15-month recession. Its record is no better than any other forecaster’s, to put it charitably. A year ago it thought inflation would peak at 4%. Now it thinks inflation is heading for 13%. It was too gloomy about the impact on GDP of the Brexit vote and failed to predict the 2008 financial crisis. All official forecasters did.
The US Federal Reserve said in January 2008, when the credit crunch was spreading fast, that the US would expand by up to 2% in 2008 and up to 2.7% in 2009. But GDP shrank by 0.3% in 2008 and 2.8% in 2009. Andy Haldane, the former chief economist at the Bank, compared economists’ failure to predict the crisis with Michael Fish missing the 1987 storm.
The bigger picture is that the stagflationary hurricane is well and truly here, regardless of whether the economy ends up shrinking for several months or not. The Bank, like its counterparts elsewhere, has been caught on the hop by inflation. Now it will try to subdue it by hiking interest rates, and talk has turned to what measures could alleviate the pain and bolster growth – state payments to help with energy bills and tax cuts, principally.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Overlooking the key ingredient
The fuss over the downturn and fiscal stimuli misses a key point, however. The measures being discussed relate to the demand side of the economy, but it is improving the supply side that will do the most good over the longer term. The last time we escaped stagflation, in fact, reforms to improve the productive capacity of the economy, such as privatising state behemoths and taming trade unions, helped pave the way for a lasting recovery. Those reforms helped bolster productivity, and we urgently need to do that again. “Productivity isn’t everything, but in the long-run it is almost everything,” as economist Paul Krugman put it.
The more effectively an economy uses its workforce and capital, the richer it will get. But Britain’s productivity growth is abysmal, as Neil Shearing of Capital Economics points out. Average output per hour worked rose by just 0.7% a year in the ten years before Covid-19, a far cry from the 1.7% average in the five years to 2008 and the 2.8% seen in the 1980s. Productivity growth hasn’t been this low since the start of the industrial revolution, says David Smith of the Sunday Times.
According to The National Institute of Economic and Social Research, if productivity had grown by an annual 2% in the past decade, the average worker would now be £5,000 better off.
So what’s the problem? What isn’t? It’s a toxic cocktail of shabby infrastructure, low business investment, poor skills, and over-centralisation (which implies less scope for a region’s institutions to galvanise growth and innovation, among other things). There is no way of cutting this Gordian knot, but you have to start somewhere, and it would have been helpful to hear from the Tory leadership candidates how they might approach it. Liz Truss may present a plan when she wins. But don’t hold your breath – and perhaps top up your gold.
Come and see Merryn at her Edinburgh Fringe show at Panmure House (once home to Adam Smith), which runs from 25 to 28 August. Guests include MoneyWeek favourites Russell Napier, James Ferguson and Edward Chancellor. Book your tickets here. All proceeds go to the upkeep of Panmure House.
-
Energy, healthcare and utilities: how to tap into AI in the real economyAI promises to add to the productivity and profitability of much of the economy beyond tech. Here’s two themes to tap into AI in the real economy.
-
How Junior ISAs could help with inheritance tax planningLooming inheritance tax changes will limit how much pension wealth can be passed on but more people may be maxing out their loved ones’ JISA allowance instead
-
Rachel Reeves is rediscovering the Laffer curveOpinion If you keep raising taxes, at some point, you start to bring in less revenue. Rachel Reeves has shown the way, says Matthew Lynn
-
The enshittification of the internet and what it means for usWhy do transformative digital technologies start out as useful tools but then gradually get worse and worse? There is a reason for it – but is there a way out?
-
What turns a stock market crash into a financial crisis?Opinion Professor Linda Yueh's popular book on major stock market crashes misses key lessons, says Max King
-
ISA reforms will destroy the last relic of the Thatcher eraOpinion With the ISA under attack, the Labour government has now started to destroy the last relic of the Thatcher era, returning the economy to the dysfunctional 1970s
-
Why does Trump want Greenland?The US wants to annex Greenland as it increasingly sees the world in terms of 19th-century Great Power politics and wants to secure crucial national interests
-
Nobel laureate Philippe Aghion reveals the key to GDP growthInterview According to Nobel laureate Philippe Aghion, competition is the key to innovation, productivity and growth – here's what this implies for Europe and Britain
-
'Investors should brace for Trump’s great inflation'Opinion Donald Trump's actions against Federal Reserve chair Jerome Powell will likely stoke rising prices. Investors should prepare for the worst, says Matthew Lynn
-
The state of Iran’s collapsing economy – and why people are protestingIran has long been mired in an economic crisis that is part of a wider systemic failure. Do the protests show a way out?
