EDITOR'S LETTERMerryn Somerset Webb
Poor Michael Fish. Last week we used his picture to illustrate a story about how you should take all forecasts on markets and economies with a pinch of salt. Then late last week Andy Haldane, the Bank of England’s chief economist, referred to the general failure of his profession to forecast the financial crisis of 2008 as its “Michael Fish moment”.
This is unfair on two levels. The first is that, unlike that of the economists, the BBC weather forecaster’s mistake was a one-off with few lasting consequences. Sure, a few hours before the great storm of 1987, which felled six of the seven oaks of Sevenoaks and left hundreds of thousands without power, he forecast that there was no need for most of us to worry because all “the strong winds would be in Spain”. But the majority of his forecasting career passed in a blur of adequately accurate predictions.
The second is that in his forecast Fish was doing what all the most accurate forecasters do. He was saying that nothing very exciting was likely to happen – that tomorrow would in all likelihood be much like today. This makes sense. After all, be it weather or GDP growth, gradual shifts are far more common than dramatic changes.
With that in mind, look to the forecasts made by the UK’s top economists at the beginning of 2016. They were, says David Smith in The Sunday Times, pretty good. They forecast growth, inflation, joblessness and the current account to be not that different to their levels in 2015 – and they were generally right. What is interesting, however, is that all these forecasts were based on the assumption that the UK would vote to stay in the EU. So growth might fall a bit pre-vote (uncertainty) and rebound post-vote (uncertainty gone). Had they known that the vote would go the other way, they would almost certainly have offered rather different forecasts.
They would probably have been convinced that Brexit would have caused an immediate recession, a house-price crash and hundreds of thousands of job losses. They would then have been completely wrong – because as we now know, things have carried on much as they were before anyway, making the original forecasts look pretty good!
There’s a lesson here. Most years nothing dramatic happens. There is lots of scope for them to happen – but mostly they just don’t. So while this could be the year politics goes really nuts, bonds collapse and stocks crash, it is more likely not to be. So the sensible investor will approach the markets Fish-style (we’ll notice wind in Spain, but it won’t affect us), yet prepare for the odd oak to come down too. Assume the world will muddle on as normal, but hold gold as insurance against another 1987 or 2008.