Gloomy Economic Forecasters at Risk of Getting it Wrong Again in 2018

“A key reason why most forecasters were too gloomy about the UK economy last year was that Brexit related uncertainty was much less damaging than they had expected,” - Jonathan Loynes, chief economist at Capital Economics.

Forecasts for Brexit Britain are dominating headlines thanks to a recently leaked government paper that shows, under all scenarios modelled, the economy will suffer below-par growth rates. 

The forecasts have been latched onto by those in the Remain camp and have been questioned by those advocates of Brexit who argue that, so far, all attempts at forecasting UK economic growth under Brexit have been incredibly poor.  

Indeed, on evidence they are right - the majority of forecasters attempting to predict UK economic growth of late have been found guilty of making a few key errors. 

The current consensus forecast, or the average estimate, is for the UK economy to grow by 1.4% during 2018. This implies a majority of economists think a substantial slowdown from the 2017 growth rate of 1.8% is likely during the quarters ahead.

According to Capital Economics, there is a real chance forecasters are repeating the very same mistakes that led their estimates of what would happen after the Brexit referendum to be so wide of the mark.

As a prime example, Credit Suisse economists released the following forecasts following the EU referendum:

“What we now expect: A shallow recession in the UK in the second half of the year, with GDP falling by just over 1%. That should be driven by a halt in business investment as firms react to the uncertainty triggered by the vote; and a squeeze in consumer spending as a consequence of currency depreciation and higher inflation.“

“We have cut out GDP forecast for this year to 1.0% from 1.8% and our 2017 forecast to -1.0% from 2.3%.”

“We expect a recession in the second half of the year and policy easing from the Bank of England.”

“Our economists now forecast a recession in the UK, and a contraction in GDP of 1% in 2017.”

By the beginning of 2017 the consensus forecast for GDP growth had risen to 1.3% and by the middle of last year it had been upgrade again, that time to 1.5%. In all cases these estimates proved to be overly pessimistic.

Office for National Statistics data showed just last week that the UK economy actually grew by 1.8% during 2017, which represents a minor 10 basis point slowdown from the 1.9% seen in 2016.

“A key reason why most forecasters were too gloomy about the UK economy last year was that Brexit related uncertainty was much less damaging than they had expected,” says Jonathan Loynes, chief economist at Capital Economics.

“Judging by the gloominess of consensus forecasts for this year, they are about to make the same mistake again” Loynes adds.

Reasons cited by economists for the anticipated dire performance in 2018 are varied but almost always afford prominence to things such as “Brexit uncertainty”, pressures on household incomes and consumer spending, as well as an expected fall in the value of business investment.

For instance, brokerage firm Davy - in their latest investment opportunities insight briefing - maintain a bearish UK GDP forecast that is based on what Capital Economics have labelled mistaken assumptions.

Davy notes:

“The UK economy will face tougher challenges in 2018. Davy forecasts UK gross domestic product (GDP) growth at 1.5% for 2017, slowing down to 1.2% in 2018, significantly below the 2.6% growth rate in the two years before the referendum.”

“This deceleration comes at the same time as there is a squeeze on consumer spending from rising prices and slowing house price inflation. In addition, Brexit uncertainties continue to provide a drag on employment and investment."

But many of the negative drivers that supported earlier gloomy estimates, and that are baked into the current consensus, have either gone into reverse during recent months or, in one case, was never really much of an issue for the economy in the first place.

Inflation has risen sharply since the referendum, reaching 3.1% in November 2017, which has had an automatic and negative effect on the value of real GDP during the time since the Brexit vote.

Rising prices in the shops and slow growth in wage packets have also meant that consumer spending took a sharp knock at the beginning of 2017 and has continued in a haphazard fashion ever since.

But the Pound has risen and inflation has started falling again. It looks likely to fall further through 2018 and, in doing so, easing the pressure on the all-important UK consumer.

Surveys at the start of 2018 from GfK and Lloyds Bank confirm that confidence is returning.

“There was little evidence of the broader negative effect from Brexit uncertainty that many forecasters had anticipated,” says Loynes.

UK Economic Growth to Rise in 2018, Not Fall

Now, with the Pound Sterling having stabilised and the economy continuing to motor on at a steady, albeit-reduced, rate of growth, price pressures are beginning to recede.

Headline inflation fell from 3.1% to 3% in December. Capital Economics have suggested this will mark the beginning of a trend that should see inflation continue to fall over the remainder of 2018.

“Surveys of firms’ investment intentions suggest that investment growth is likely to accelerate this year, rather than decelerate as consensus forecast assume,” writes Loynes, in a recent note.

“Meanwhile, the combination of strong global growth and the competitive pound looks set to fuel a further pick-up in the growth of exports.”

All of the above suggests the latest round of forecasts for the UK economy are too gloomy once again, leaving them liable to revision at a later date.

“Overall, we continue to expect the UK economy to expand at an average rate of around 2% in 2018, a touch faster than the 1.8% growth registered in 2017 and well ahead of the current consensus forecast of 1.4%,” says Loynes.

For Pound Sterling, this bodes well. Should the economy perform better than consensus expects, it will surely be bid higher.

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