Still not thinking the very thinkable on Britain’s future

February 20, 2013

Mark these words. Not only is Britain going to avoid a triple-dip recession, but the economy won’t shrink again as far as the eye can see.

If that sounds ridiculously optimistic, don’t tell the more than 30 economists polled by Reuters last week, none of whom predict even a single quarter of economic decline from here on.

Even the Bank of England, not exactly famous these days for its accuracy in economic forecasting, has said for a long time that a quarter or two of contraction here and there is to be expected. That was underlined by Wednesday’s unexpected news some policymakers voted for more bond purchases this month.

And most Britons are now used to an economy that has done little but vacillate between growth and contraction over the last few years.

It seems only the market economists, working mainly for banks and research institutions, are leaning firmly towards growth.

To be fair, they aren’t predicting a big surge for the economy in the next 18 months either, given how harsh austerity measures at home and a weak global economy will crimp activity for a long time for a long time to come.

But that only makes their en masse reluctance to countenance even a mild downturn from here on all the more striking.

“People have to put money where their mouth is eventually – even economists,” said Lena Komileva from consultancy G+ Economics.

“But there is a reluctance to forecast the unthinkable. That is, a stagnation in the economy – following a disappointing recovery – could actually be followed by renewed contraction.”

Indeed, the last few years have brought some unfortunate failures of foresight:

  • Most obvious was in mid-2008, when no economist polled by Reuters predicted a UK recession. We now know it was already in one – and the worst since World War Two.
  • When the economy was headed south again in the last three months of December 2010, no economist polled by Reuters forecast any downturn.
  • And in September 2011, the Reuters poll had only a single forecast for any kind of economic contraction through to the end of 2012. Britain started a new recession the quarter immediately following that poll.

“There’s a great deal of uncertainty about the economic outlook, but the certainty I guess we do have is that forecasters have continuously overshot actual growth,” said Komileva.

“The difficulty with forecasting a recession at this point is that it has to be matched by a forecast for more quantitative easing, which is rather difficult when the inflation outlook is so poor,” she added.

Not all economists are reluctant to challenge that equilibrium.

For instance, Michael Saunders at Citi has long held a view that the Bank of England will end up spending 500 billion pounds on its asset purchase programme – a forecast that appeared outlandish to many in 2011, when it had spent just 200 billion pounds.

The total stands at 375 billion pounds but there is plenty of speculation in markets that Governor-designate Mark Carney will be more than happy to print more.

He may need more bad news to justify it — news of the kind that economists, of all people, aren’t comfortable predicting.

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Why is it that we use some of the most powerful computers in the world to find out if it might rain tomorrow, but when it comes to the economy the best we can do is ask 30 blokes what they reckon?

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