19 Aug 2012

The Follies of Forecasting

A broad based recovery started in end–2009, but faces significant headwinds during 2011, which can be mitigated by monetary policy remaining supportive. The planned fiscal consolidation is needed to ensure that the fiscal position will be sustainable over time. Nonetheless, it adds to the headwinds from weak real income growth and a fading rebound in global trade. Monetary policy should hence remain expansionary, even if headline inflation is significantly above target, to support the recovery. OECD Report Mar 2011.

The Organisation of Economic Co-operation and Development according to their website the mission of the OECD is "to promote policies that will improve the economic and social well-being of people around the world." No doubt they are sincere in this. But look at what they were saying about the UK in 2011:
  • broad based recovery
  • "headwinds" can be mitigated by monetary policy
  • fiscal consolidation (i.e. cuts in public spending) needed to ensure sustainability

The recovery turned out to be a mirage. Far from being "broad based" the emergence from technical recession was tentative and weak, and now we are back in technical recession with shrinking GDP and declining production. This week we learned that employers have been putting off redundancies so unemployment is likely to rise sharply within a year.

The "headwinds" can not, apparently, be mitigated by monetary policy (low inflation rates & quantitative easing). The base interest rate has been 0.5% for two years now and the best we can say is that it's helping to prevent runaway inflation, but it has not lead to more investment in the real economy. Instead actual lending interest rates remain high due to the high risk, and the amount of lending has stagnated.

If anything fiscal consolidation has stymied demand and growth and is extending the recession.

Here is the graph accompanying the statement, covering the period 2000-2011 (GDP is indexed to 2007)

This is the graph of key indicators that accompanies the statement. It show GDP on a downward trend after a bounce which is not in fact a broad based recovery at all. It shows that the UK's GDP has consistently been at the bottom of the OEDC range. It shows that unemployment is high and possible trending down - though as I say we heard this week that employees have been delaying redundancies, so the downward trend is not going to continue. The graph shows that inflation is very volatile, but with an upward trend and with the base rate at 0.5% there is little the Bank of England can do to help, especially as their QE is a source of inflation. The present downward trend is unlikely to be sustained.

The OECD's most recent forecast is May 2012
The global economic slowdown and uncertainties in the euro area outlook, alongside fiscal retrenchment and private deleveraging, are generating headwinds to growth. Growth will remain weak in the first half of 2012, but should gain momentum thereafter, with private consumption supported by higher real incomes, as inflation slows, and exports and business investment revive with stronger external demand. Unemployment will continue to rise over the projection period, due to job cuts in public administration and weak output growth.

Budget deficit reduction remains on target, fostering fiscal policy credibility and leaving room to let the automatic stabilisers work. Structural reforms to promote fiscal sustainability, strengthen the financial sector and improve educational outcomes should help the necessary rebalancing of the economy from debt-financed private consumption and public spending to exports and investment. OECD.

Note that at least the OECD include private sector deleveraging as a cause of slow grow.  Nothing to be done about it though apparently.

My Non-professional Forecast

GDP shrank in H1 2012, and looks likely to shrink again in 2012, probably by about the same amount to give us -2% for the year. It might actually pick up but over the next 10 year at least nett growth will be zero. Both construction and exports are slowing and there is continuing lack of investment funding. Our markets are suffering the same problems that we are! Private sector deleveraging has only just begun, and won't make much difference for some years to come. Business insolvencies are beginning to rise again as the recession drags on and begins to make inroads into marginally profitable businesses - compare my comments on Travelodge.

So where is the growth going to come from? Burnley Savings & Loans? Answer: it isn't going to come

Unemployment is not rising as predicted, as employers unexpectedly hold back on redundancies, but it will rise sharply when employers finally realise that the recession is going to go on. At some point people will realise that the DWP are shuffling people between categories so many of the people who ought to be counted as unemployed are in government "work schemes" and the like - not sure why they hide this New Deal style policy as creating government funded jobs worked so well for the USA in the Great Depression.

Budget deficit reduction is actually far below the Osborne plan and looks more like the Darling plan (according to my MP). Budget deficit reduction received a blow as the trade deficit ballooned in H1. Also as revenues fell more borrowing was required to sustain even the reduced level of spending - this pattern carries with it a danger of becoming a vicious circle especially as the government seems to be deaf to any suggestion that they're going too fast.

Finally the government will fail to implement any major structural reforms in the finance sector. Their in-house review will grab headlines but not make the kind of changes that would protect us from parasitic financial practices. There will be some public displays of contrition from bankers, and perhaps a few high profile resignations (with full bonuses), and mean it will be business as usual. At best the government will implement the Vicker's Report ring-fencing which will protect savings (but not pension funds) and allow casino banking to carry on unhindered so that it can cause yet another debt bubble and collapse in the near future.

The Euro-zone can't hold, and Greece, Italy, Spain and probably Ireland will need to leave it. They're mad if they don't as it's destroying their economies. Even if Germany offers to take on their debts, they need to have a weaker currency to begin to rebalance their economies. Germany and France will take other countries with them, but with more stringent rules on budgets which Germany will eventually control (not that they were fiscally responsible according to the Maastrich Treaty).

OK. Let's come back to this early next year and compare my predictions to the OECDs.

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