This year has been a pretty miserable one for many people for obvious reasons, but it has been a quite humiliating one for the economists. It is not just that most of them got their 2023 forecasts badly wrong. It was always going to be difficult in a time of wider turmoil to predict how any particular element – growth, inflation, unemployment – was going to develop.
However, too often they made extreme negative predictions that caught the headlines but were really always at the outer bands of the possible.
For example, just over a year ago the Bank of England’s central forecast was for the UK economy to shrink by nearly 2 per cent this year. Yet the latest figures from the Office for National Statistics show that in the year to October, it grew by 0.3 per cent. That’s disappointing and I expect the number will be revised up. But at least it’s a plus, not a minus.
Or take inflation. There were some really hairy forecasts for that. In summer 2022 Goldman Sachs predicted that if energy prices went on rising inflation would peak at over 22 per cent in 2023, and even if they came down it would be nearly 15 per cent last January. As it turned out, the peak in October 2022 was just over 11 per cent and last January, it was down to 10 per cent. Terrible, yes, but not as frighteningly so as predicted.
Or take house prices. Nomura surveyed the market last January and concluded that they would fall by between 10 per cent and 20 per cent from their peak by the middle of the coming year. Well, we’re not there yet and the most recent estimates from Nationwide last month show the market rising for three months on the trot and prices just 2 per cent down from November last year.
No wonder the derogatory label for economics, “the dismal science”, coined by Thomas Carlyle, has stuck.
But why? I think the first part of the answer is that it is not a science. Carlyle was wrong on that. We have economic models that predict what might happen, but they are only as good as the data put into them. There was no precedent for the pandemic or the war in Ukraine, so the models were pretty useless. Added to that was a collective failure of economists in the central banks to realise that printing huge amounts of money might lead to a surge in inflation, a point made by the Bank of England’s former governor Lord King. Get inflation wrong and everything else goes haywire.
Finally, I think we have to make intuitive judgements about how ordinary people behave under difficult circumstances, and – crucially – acknowledge where we might be wrong. If this failure of economists leads to a bit of self-awareness, that will be progress.
So where might that intuitive, common-sense outlook for 2024 take us? Three big points.
One, this year will be tough for the world economy. There is huge disruption right now and that will go on. Inflation will come down and will cease to be a major issue by the summer, but the world is labouring under the load of debt built up during the pandemic and while interest rates are heading down, they will remain high enough to put pressure on over-borrowed companies, countries, and indeed ordinary people. So there may be some sort of recession in the US and Europe, but actually I think the UK will probably scramble through with a bit of growth, given its resilience in the past year.
Two, as far as Britain is concerned, while politics will dominate the headlines, what will really matter will be how quickly public finances improve. People focus on what the Bank of England does about short-term interest rates and don’t notice what is happening to long-term ones. But the yield on 10-year gilts has fallen from 4.6 per cent in October to below 3.5 per cent now. That is huge. It affects everything, from the cost of government borrowing to longer-term mortgage rates. Companies that are struggling with high debts have a shot at keeping going. Families under pressure can hope the squeeze will ease. And if the Government can really get its borrowing costs down, that either helps the Tories sell themselves as credible managers of the economy, or bequeaths one in better shape for Labour than they currently expect.
Third, and I think this is really important. Technology keeps moving forward and our ability to use it advances too. Ultimately this is what drives living standards. We figure out simpler ways to get things done – ways that use less energy, take less time, hopefully make work more pleasant, though that last part doesn’t always happen. Of course, technology also creates problems, and we have the example of how to regulate generative AI at the moment. But right across the developed world we have an opportunity to lift our collective game, and that is the challenge for us all in 2024.
Sometimes it is easier to look a long way forward than it is to look at next month – or year. The Centre for Economics and Business Research (CEBR) does just that every year, but this time has gone forward to 2038, with some intriguing results. The report is here but let me pick out half a dozen of the more interesting points.
One, the CEBR expects the UK to be the fastest-growing big European economy over the next 15 years, pulling well clear of France and closing the gap with Germany. France will be held back by the large size of its public sector, while Germany will suffer because of its over-reliance on manufacturing.
Two, UK financial services will recover from years of underperformance, as the impact of Brexit has been exaggerated or not fully explored.
Three, the gap between Europe and the US will continue to widen (the UK will still underperform the US), and Italy will drop out of the 10 largest economies.
Four, China will pass the US in size around 2037.
Five, India becomes the number three economy behind the US and China in 2037. That is earlier than many other similar projections.
Six, real global growth will average around 3 per cent, maybe a bit less, through the rest of this decade, pretty much the same as it has been over the past 40 years. So on a long view, no significant damage to growth, despite the headwinds we all know about.
How credible is all this? I expect that the positive outlook will come as a bit of a surprise, but it is really a continuation of a trend, for the UK has grown faster than Germany and France (and a lot faster than Italy) since 2000. A lot of this has been driven by a rise in the size of the working population, so our productivity problems remain, but it is encouraging none the less. I should add that past projections by the CEBR have been quite good.
You may have read about the projections for the UK as these have been widely reported, but my own judgement is that the positive view of the world is more important – and in particular the outlook for India. But if you are so inclined do have a read of the report, taking it as a framework to think about the world, rather than anything more detailed.
And remember, economists do get things wrong!
login
who are we?
contact us
qosheapp
Toi Staff
Gideon Levy
Belen Fernandez
Andrew Mitrovica
Mort Laitner
Rami G Khouri
Ali Fathollah-Nejad
Nikkei Editorial
visit website
