MacroScope

Rose-tinted forecasting still in vogue for Britain’s independent budget watchdog

March 20, 2013

Britain’s independent Office for Budget Responsibility slashed its growth forecasts¬†for this year ahead of George Osborne’s Budget on Wednesday. But looking longer-term, it now has the unusual distinction of being more optimistic about Britain’s long-term economic health than the Bank of England, often pilloried for its rose-tinted views.

And rightly so. The Bank’s famed GDP fan charts have been exceptionally over-optimistic. Until recently, it routinely suggested the economy was more likely to grow more than 5 percent annually than contract even slightly, which was plainly absurd.

In its short life, the OBR too has had its fair share of forecasting blunders. Created with the arrival of the coalition government in 2010, that June it predicted 2012 GDP growth of 2.8 percent. In Wednesday’s report, it estimated the economy instead grew 0.2 percent last year.

Both the OBR and the Bank share a view that the UK economy will soon enjoy a semblance of moderate growth (a prediction that keeps getting pushed back). However, there’s a very slight, but revealing divergence of views.

Unlike in previous years, the Bank’s GDP fan chart from its February Inflation Report (pictured right and reversed) keeps open a small probability the economy will shrink on an annual basis between now and 2016, and likely beyond.

The OBR’s own fan chart (left), however, shows that by 2016 there is more chance of stellar growth (by UK standards) of around 5 percent, than there is the economy will shrink again.

Click to enlarge:

 

N.B. Time (X-axis) not to scale

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