Adviser > News > May 2010 > How accurate is economic forecasting in the UK?
How accurate is economic forecasting in the UK?
Ian Kernohan, Economist for Royal London Asset Management, shares his thoughts on the accuracy of economic forecasting in the UK and gives his view on the direction of interest rates.
Economic forecasting - an art or science?
Economics is the dismal pseudoscience and, although it is dressed up with complex econometric modelling to give it a veneer of credibility, economic forecasting is definitely more art than science.
Ian Kernohan,
Economist,
Royal London Asset Management
In creating the Office for Budget Reporting (OBR), the new coalition government wishes to remove alleged government interference from the forecasting process. While this sounds good in theory, I'm not sure the idea that so called "independent forecasters" systematically produce more accurate forecasts for the UK economy than the Treasury really holds water.
In some years, HMT forecasts have been more accurate than the consensus, often they haven't been. No forecaster predicted the huge fall in GDP which occurred last year, before it was too late to do anything about it. The Bank of England (BOE) regularly gets its inflation forecast wrong and yet no one is suggesting that they need supervision. I've even been known to get forecasts wrong myself. So let's just accept that the future is essentially unknowable, that point forecasts for the economy are seldom useful and, if correct, it is usually by accident rather than design.
Value of scenario analysis
On our government bond desk, we find that scenario analysis is a much more useful way to approach the problem of future telling. We do have a central view, but continually assess the probabilities on either side.
Talking of forecasts; despite the shift in market interest rate expectations towards no rate increases over the next couple of years, we are still of the view that the need to anchor inflation expectations in the context of a general upswing in economic growth, and an inflation rate which is well above target, will lead to at least one rate increase in the UK before the end of this year. With the market so convinced that rates are set to stay at 0.5%, any shift in BOE language, never mind any actual rate rise, will provoke a major sell off at the short end of the gilt curve and we see flatter curves through the second half of the year.
The views in this article reflect those of Royal London Asset Management. Investment returns may fluctuate and are not guaranteed.
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