Benchmarking a potential recovery
I sometimes feel very sorry for the OBR. They have been given one of the most difficult jobs in economic policymaking – forecasting the future. And the media and political class seem to hang on their every estimate, taking as gospel their twice yearly pronouncements. Their record so far hasn’t exactly covered them in glory, but then no one’s forecasting has been especially good in the past few years.
The Treasury publishes each month a round-up of the views of 40-odd marcoeconomic forecasters, from the City and elsewhere, and very few of them can get things right one year in advance, let alone 2 or 3 or even 5 or 6. The same applies to the Bank of England. The OBR’s specific problem isn’t that its forecasting has been poor (its not been much worse than anyone else’s), it’s that their forecasts receive so much more attention than anyone else’s.*
I say this to emphasise the uncertainly that surrounds any macroeconomic predictions and by way of caveat to all that follows.
Back in November the OBR revised down its growth forecasts heavily. In December the gloom spread quite widely and by early January it’s fair to say that a double-dip recession was reasonably widely expected.
It now looks like we may avoid one. It’s important not to read too much into any single indicator but the combination of better than expected public finances, better than expected retail sales, decent survey data in January and falling inflation all point towards some (reasonably weak) economic expansion in the first quarter.
Now all of these can be caveated – good public finance figures can be followed by bad ones – as happened last January/February, retail sales don’t necessary track consumption, German
survey data was strong in January too but then weaker in February and falling inflation might be driven by factors that point to weakness not strength.
In addition the latest money supply numbers point to weakness and the latest Bank of England MPC minutes are filled with gloom. Decent growth in January could be followed by weakness in February and March. The Eurozone crisis is far from resolved and has the potential to become a Lehman-style ‘game changer’.
It feels odd, as someone who has generally more pessimistic on the UK economy than the mainstream view for about 5 years now to be writing this, but taking all of this together there is a real chance that the OBR has revised growth down too much (at least in the short run) and will soon – maybe as soon as March, more likely by Autumn, be revising growth forecasts upwards.
So then – is it time to rejoice and declare the crisis over?
Far from it.
Even decent-ish upwards revisions to the OBR numbers are unlikely to bring them back to where they were in June 2010 at the time of Osborne’s first budget. The table below summarises this:
The OBR could double its estimate for 2012 growth and still be well below what was expected 18 months when Osborne embarked on a fiscal tightening that he thought the economy would be strong enough to handle. The big undershoot in 2011 means that this growth would be coming off a lower base.
If the economy were to grow by say 1.5% in 2012 – more than double what many forecasters currently expect – then the government would obviously hail this as a success but it would still be well below previous expectations and represent a historically weak recovery. Forecasts have become so pessimistic that what would normally be regarded as a weak outturn may now
be celebrated as a great success.
But perhaps more importantly than this, there is the question of what a recovery might mean for ordinary people.
If the economy does begin to recover can we call it a meaningful recovery if wage growth for those in the middle and the bottom remains very weak? If living standards continue to fall? Should we hail a recovery in the jobs market if the jobs being created (as now) represent under-employment, precarious work and involuntary part-time jobs? What will a recovery feel like if it is accompanied by unfair changes to tax credits? If public service provision is weaker? If household debt rises? What will the regional picture look like? Will we see a recovery concentred in the South-East with much less growth across the UK?
An historically weak recovery, and one that doesn’t work for ordinary people, can’t be allowed to be chalked up as a success.
*I’m as guilty as anyone else here. In April last year I wrote that I expected a ‘double dip recession’. Whilst at the time the consensus was more optimistic (median estimate for growth of 1.8% in 2011) and I might been more right than wrong in comparison to many other forecasters, there’s no getting away from the fact that I was, probably, ultimately wrong about this. At least on the timing, and timing is crucial.