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.
Subscribe to 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.
Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
-
Hargreaves Lansdown bumps up cash ISA with £25 cashback - does it beat the wider ISA market?
Just days before the end of the tax year, Hargreaves Lansdown has launched a £25 bonus for those who open a cash ISA on its savings platform. Does the bonus make it a competitive rate, and are you eligible for the cashback?
By Vaishali Varu Published
-
FCA targets finfluencers with new social media guidance
So-called finfluencers have been warned by the UK financial watchdog that they could face prosecution if they fail to follow new rules.
By Henry Sandercock Published
-
Should your business invest in a VoIP phone service?
Here's what you need to know about VOIP (voice over IP) services before landlines go digital in 2025.
By David Prosser Published
-
The end of China’s boom
Like the US, China too got fat on fake money. Now, China's doom is not far away.
By Bill Bonner Published
-
What is the future of Royal Mail in the UK?
With fewer of us sending letters and parcels, the Royal Mail is finding dealing with the nation’s post is an increasingly unprofitable and costly business.
By Simon Wilson Published
-
What's the secret of Manolo Blahnik's success?
Fashion maestro Manolo Blahnik shows little sign of slowing down at 81, and his company notched up a record financial year in 2022. What is the secret of his success?
By Jane Lewis Published
-
Michelle Mone's "tough year of pain"
Michelle Mone liked to portray herself as a working-class heroine who worked her way to the top through grit and determination. But her pedestal is built on sand.
By Jane Lewis Published
-
Trevor Milton, the Elon Musk wannabe, is jailed for fraud
The former CEO of Nikola, Trevor Milton, has been found guilty of lying about the development of the company's electric trucks.
By Jane Lewis Published
-
Directors should think twice before waiving limited liability
Should small-business directors ever provide a personal guarantee in return for bank finance?
By David Prosser Published
-
Why Russia's economy is doing better than predicted
Sanctions were supposed to strangle Russia’s economy, but it seems to be thriving. What’s going on?
By Simon Wilson Published