So the IMF has slashed its growth forecasts for the UK economy. This august body has just pronounced that Britain’s economy will come to a virtual standstill. Growth in 2012 will be just 0.2pc, compared with the IMF’s April forecast of 0.8pc growth. It cut its 2013 growth forecast by the same margin to 1.4pc from 2pc. Britain’s growth downgrade for 2012 is the largest of any country in the developed world.
Basically, am I bovvered? More importantly, should anyone else be? Let’s look at the track record.
The last major economic crisis was the East Asian one in 1998, when the previously booming economies experienced spectacular falls in output. But where was the IMF in this? In May of 1997, the IMF predicted for 1998 a continuation of the enormous growth rates which those economies had experienced for a number of years: 7pc growth was projected for Thailand in 1998, 7.5pc for Indonesia and 8pc for Malaysia. Yet the actual outturns for 1998 for these countries were spectacularly worse, with output not growing but falling by large amounts. The fall in real GDP in 1998 was –10pc in Thailand, and –7pc and –13pc in Malaysia and Indonesia, respectively.
Think back to 2008. In January that year, according to the consensus forecasts, it was going to be business as usual in 2009. A steady 2pc growth in both the UK and the Eurozone, and 2.7pc in the US. In fact, as we now know, there was the worst collapse in output since the Great Depression of the 1930s. GDP fell by 4pc in the UK, 4.3pc in the EU and 3.5pc in America.
The forecasts were, admittedly, revised down as the year went on. But as late as August 2008, just a few weeks before the collapse of Lehman Brothers, positive growth of GDP was still being predicted for 2009.
Even more incredibly, by then the UK economy was already in recession. Output had started to fall in the April-June quarter of that year. And the same sharp falls began in America.
Things haven’t really got any better than when the American econometrician Lawrence Klein published the first forecasts of the US economy in 1945. Klein was eventually awarded the Nobel Prize for his work in this area. He predicted that in 1946, unemployment in America would be 8 million. It turned out to be 3 million.
The lesson of all this is that economic forecasts need to be taken not just with the proverbial pinch, but with the entire contents of a Siberian salt mine. Yes, people like to have them, and need to form a view about the future. But they are at their worst exactly when an accurate forecast would be most useful. At turning points, when the economy is going into a recession or a boom.
by Paul Ormerod.
This article was featured in CityAM on 18th July