It is now widely understood that the Treasury’s forecasts for economic growth projections relating to Brexit were very wide of the mark. The Treasury’s analysis “the immediate economic impact of leaving the EU” predicted, with near certainty, that the UK would experience a technical recession in the immediate aftermath of a Brexit vote (see Table 1). The only question – in the mind of Treasury analysts – was how severe the recession would be.
Instead, the UK has posted robust growth figures for Q3 and Q4 of 2016 (+0.6% and +0.7% respectively). Of course, Mark Carney argues that the Bank of England’s monetary policy actions in August 2016 helped stave off any potential recession. The Bank’s action may have helped shore up confidence, but it cannot explain the huge discrepancy in the actual growth numbers against those forecasted pre-referendum. Evidence, in fact, suggests that there are significant lags in monetary policy’s impact on output growth, meaning that any short term impact arising from monetary loosening is limited.
Table 1: Predictions from Treasury following a Leave Vote vs Actual Growth Figures
Treasury Shock Scenario
Treasury Severe Shock Scenario
Actual Growth Figures
Source: UK Treasury and Office for National Statistics
So, why did the Treasury get it so wrong? As Roger Bootle points out, many economic institutions – including the Bank of England, the HM Treasury and the IMF – have, to some extent, fallen into the trap of so-called ‘group-think’. These institutions come to broadly similar conclusions because their economists tend to make the same assumptions and use the same methodologies.
And, of course, traditional economic forecasts cannot predict economic shocks with any certainty. By very definition, an economic shock is unexpected. All traditional economic forecasts tend to do is extrapolate present circumstances into the future. They are therefore very bad at predicting the impact of a one-off event such as Brexit.
To give credit where it is due, the Bank of England has accepted there is a major problem. Earlier this year, the Bank of England’s chief economist admitted that ‘the economist profession’ is in crisis, having failed to foresee the 2008 financial crisis and having misjudged the impact of the Brexit vote. He even described the Bank of England’s warning of a downturn in the wake of Brexit as a “Michael Fish” moment.
Mark Carney, Governor of the Bank of England, also recently admitted to the Treasury Select Committee that Brexit is no longer the biggest risk to the UK’s financial stability, reversing his previous position. He even went further by arguing that Brexit posed a greater risk to the European continent.
Although the economic forecasts prior to the EU referendum were irritating at best (and highly irresponsible at worst), the subsequent U-turn by Bank of England officials is refreshing. It suggests that lessons are being learnt. And, of course, forecasters understand better than anyone else that the public's trust in economists will further plummet should any future fear based economic forecasts fail to materialise again.
So, hopefully, there's every reason to believe that fear based economic forecasts will be a thing of the past.