Forecasting the UK: How did we do?

At this time of year journalists like to look back at how forecasters did over the past twelve months. One of the comparisons I follow most keenly is that compiled by David Smith in the Sunday Times, even though I have some reservations about the methodology (here for the full article if you can get past the paywall). Smith makes the point that those making UK forecasts in 2018 did pretty well. But what has struck me most in recent weeks is not so much that many forecasters did well in their assessment of UK growth in 2018, but how consistent the consensus has been for the past two years regarding the impact of Brexit on the economy.

Each month the Treasury invites contributors to make projections for a wide variety of indicators for the current and following years, with the forecast horizon rolled over in February of each year. The first projections for 2017 were thus published in February 2016. Prior to the EU referendum the consensus was that GDP growth last year would come in at 2.1%. After a brief wobble in the summer and autumn of 2016, when the consensus dipped to 0.7%, forecasters quickly adjusted their forecasts upwards when it became clear that the economy was not falling off a cliff. Nonetheless, growth last year came in at 1.7% - a good 0.4 percentage points below pre-referendum estimates.

The first projections for 2018 were published in February 2017. What is remarkable is that over the last 22 months the projection for 2018 growth has barely changed, and although we only have data for the first 10 months of the year we have enough to be confident that it will come out close to 1.3% for 2018 as a whole. As a rough guide to assess the extent to which forecasts have changed, I used the Treasury’s database of consensus forecasts to measure the consensus projection for growth in December of each year versus the initial estimate for the year in question, made in February of the previous year. For example, in February 2017 the consensus forecast for 2018 UK GDP growth was 1.4%, implying a 0.1 percentage point deviation from (expected) outturn.

We can run this analysis all the way back to 1988. The evidence indicates that the 22-month accuracy of UK forecast projections for 2018 was the second lowest in 31 years, beaten only by 2015 which turned out to be spot on. Of course, forecasts can bounce around throughout the forecast horizon as short-term indicators give additional information. Indeed, the consensus forecasts for 2015 rose during 2014 and early 2015, only to fall back again to where they first started. One measure of forecast stability is the standard deviation of monthly forecasts, and on this basis projections for 2018 have shown the lowest degree of variation in the 31 years of available data (chart).

 

If nothing else, this rather refutes the claim by Steve Baker MP, who noted earlier this year  that he was unable “to name an accurate forecast, and I think they are always wrong.” Where forecasts do tend to go look shaky is when the economy is subjected to an unanticipated shock. A good example of this is the recession of 2008-09 which was entirely unforeseen when the first 2009 forecasts were published in February 2008, with the result that the consensus was forced to downgrade sharply. A similar, although less sharp, correction was evident during the recession of 1990-91. Whilst the economy was not subject to a shock in 2018, the forecasts have to be seen against a backdrop of high post-referendum uncertainty – it has not been a “normal” year.

One of the great ironies of the 2018 comparisons, which are based on projections submitted to the Treasury in January 2018, is that Patrick Minford’s Liverpool Macroeconomic Research (LMR) outfit[1] finished at the bottom of Smith’s rankings. You may recall that Minford is one of the leading lights in the pro-Brexit group Economists for Free Trade which produced its Alternative Brexit Analysis earlier this year which suggested: “All those who attempt to forecast the UK’s long-term future must bear the burden of having their endeavours frequently proved wrong … This isn’t a matter of misforecasting the GDP or inflation figures by the odd percentage point or two. We all do that all the time. Rather, the record is making some serious errors of judgement about some of the key issues before the country.” There is a delicious irony in this statement: Most economists believe that pro-Brexit groups are making serious errors of judgement about the economic impact of Brexit and as a consequence their forecasts are way off target.

The level of uncertainty surrounding next year’s forecasts is even greater and I will deal with that another time. Suffice to say, however, if there is a hard Brexit the consensus forecast for growth of 1.5% is likely to prove an over-estimate. For the record, LMR is forecasting growth of 1.9% next year. It is not impossible, but only if the cliff edge Brexit is avoided.

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[1] Mrs Rosemary Irene Minford has more than 75% of the company’s voting rights which of itself is not an issue. But Mrs Minford’s date of birth is given as May 1943 which happens to be Patrick’s d-o-b. Elsewhere in the filings Mrs Minford’s d-o-b is given as January 1946. I am not sure whether this reflects laxity on the part of Companies House or is another example of Minford playing fast and loose with facts. See this link for more detail https://beta.companieshouse.gov.uk/company/01645294