THE International Monetary Fund (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 0.2 per cent, compared with the IMF’s April forecast of 0.8 per cent growth. It cut its 2013 growth forecast by the same margin to 1.4 per cent from 2 per cent. Britain’s growth downgrade for 2012 is the largest of any country in the developed world.
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: 7 per cent growth was projected for Thailand in 1998, 7.5 per cent for Indonesia and 8 per cent for Malaysia. Yet the actual outturn in 1998 for these countries were spectacularly worse, with output not growing but falling by large amounts. Real GDP in Thailand fell by 10 per cent in 1998, and fell by 7 per cent and 13 per cent 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 2 per cent growth in both the UK and the Eurozone, and 2.7 per cent 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 4 per cent in the UK, 4.3 per cent in the EU and 3.5 per cent 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 to 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 8m. It turned out to be 3m.
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.
Paul Ormerod is an economist and author of Positive Linking: How Networks Can Revolutionise the World, Faber and Faber, July 2012.