The accuracy of economic forecasters put to the test

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by James Phillipps on Dec 12, 2011 at 08:37

The previous November it had envisaged the UK economy falling by 1.3%, more than the 1.1% decline that the OECD was expecting at the same time. But the OECD proved more fleet-footed, revising this down to -3.7% in April, more than treble its November forecast and lower than the 3.5% fall then chancellor Alistair Darling forecast in his April Budget. The OECD warned of a -4.2% drop in June and -4.5% in September, which jarred with the IMF, which did not move its forecast.

The Treasury did not mark down its growth expectations until the December pre-Budget, when it warned of a 4.75% fall, which still undershot the actual end figure.

So far, so confusing, but the evidence of the past three years does imply the OECD is more on the ball than the often overly bullish IMF and the OBR/Treasury, whose figures will always be felt to be politically biased, rightly or wrongly.

Looking forward to next year, the OBR is now anticipating 0.7% GDP growth down from 2.5% last March, but chancellor George Osborne said the UK ‘will avoid recession’.

Not according to the OECD, which warns of falling growth this quarter and the next pushing the UK into a double-dip recession. Overall it expects the economy to grow by a measly 0.5% in 2012, down from 1.7% previously.

Meanwhile the IMF warned the economy was in a ‘dangerous new phase’, cutting its forecast from 1.5% to 1.1%.

The City is offering a much more diverse range of outlooks, ranging from Schroders anticipating a 0.4% contraction to Capital Economics saying growth will flatline and Nomura predicting 1.5% growth. There are more bulls than bears outside of the City too, with Liverpool Macro Research expecting 2.2% growth and Economic Perspectives 2%, whereas the CEBR is forecasting 0.7%.

If the OECD and the CEBR can be deemed to be consistently among the most accurate, the OBR’s forecast of 0.7% looks close – but possibly the reality is closer to 0.6%, meaning that chance of a double-dip recession, however shallow, is very real.

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1 comment so far. Why not have your say?

Adam Murza-Murzicz

Dec 12, 2011 at 16:03

It would seem that : a) economics is not a science but an art; b) the statistics (and we all know that ultimately they lie) on the basis of which any forecasts are made have been "adjusted" and c) wishful thinking plays an enormous part in any economic forecast.

Just as in the case of weather forecasts, economic forecasts are only about 75% accurate and in acute instances are about as accurate as Michael Fish's famous statement in 1986 - i.e. why did no economist raise the issue of overlending in 2005, 2006, 2007, oops.

Ultimately, economic forecasting should come down to common sense - or am I being old fashioned?.

In recent years there have been beacons showing that the market is overheated - e.g Greenspan pointing out the level of indebtedness by the telecoms, which led to the dotcom bust in 2000 OR the fact that mortgage lending in the UK was taking place at 7 times income, whereas previously the norm had been 3.5 times.

This was all there to be seen but the economists did not see it!!

Am I alone in thinking that they, just like accountants, lawyers, HR specialists have screwed business and, perhaps, the WORLD

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