BoE admits Brexit slump prediction error, amid surging UK economy
The Bank of England has admitted economists are facing a forecasting crisis and labelled warnings of a swift and deep downturn after the EU referendum a “Michael Fish moment”.
Services sector activity jumped to a 17-month high in December as the British economy continues to exhibit signs of resilience in the face of Brexit uncertainty.
The economy has outperformed Bank of England predictions Picture: David Davies/PA Wire
The country ended last year as the strongest of the world’s advanced economies with growth accelerating six months after the EU referendum.
The closely watched Markit/CIPS services purchasing managers’ index (PMI) reached 56.2 in December, up from 55.2 in November and above economists’ forecasts of 54.7.
A reading above 50 indicates growth.
The figures mean the powerhouse sector, which makes up 80% of UK GDP, has grown at the fastest pace since July 2015.
The PMI report said the sharp expansion in December rounded off the strongest quarter of the year, driven by new business and increased hiring.
Andy Haldane, the BoE’s chief economist, said his team now face having to predict how the British economy will perform despite the “unknowable” outcome of the Brexit negotiations.
Speaking at an event organised by the Institute for Government, Mr Haldane said the performance of the economy since the referendum had been a “surprise” and admitted several forecasts in recent years had been missed.
“It is fair cop to say the profession is to some degree in crisis,” he said.
Haldane referred to failures in economic forecasting from the Great Depression in the 1930s to the Great Recession in 2008 when warnings were not heeded.
Mr Haldane compared the banking crisis to an infamous October 1987 weather forecast by BBC meteorologist Michael Fish, who wrongly denied claims a hurricane was going to hit Britain.
Hours after he said there was no hurricane coming “but it will be very windy in Spain” there was devastation across the UK that claimed 18 lives.
Asked why the BoE had forecast a “hurricane” for the economy that did not materialise, Mr Haldane replied: “It’s been very windy in Spain.”
He added: “It is true and again, fair cop. We had foreseen a sharper slowdown in the economy than has happened – in common with every other, almost every other mainstream macro forecaster.”
Of the varying forecasts of how Britain will fare after leaving the EU, the economist said it was a “genuine uncertainty” as it depends on the outcome of negotiations with Brussels.
“The precise outcome of that right now is not just unknown, but unknowable. Not just to economic forecasters but to everyone,” he said.
The BoE has drawn up models based on if the UK strikes a trade deal with the EU or has to fall back on World Trade Organisation rules once the two year period elapses after the triggering of Article 50.
“As things stand that’s as good as you will do given the cloud of uncertainty that exists and will continue to exist for some time to come,” Mr Faldane said.
That the BoE’s experts had been proven wrong in the wake of the Brexit vote “has been a thoroughly good thing” and “very much welcome,” he said.
He attributed the resilience of the economy to consumer spending and the housing market.
“It’s almost as though the referendum had not taken place,” he said.
“Of course in terms of many of the real things like pay and jobs, not very much happened during the course of last year. It is pretty much business as usual. The spending power in people’s pockets was not materially dented during the course of last year.
“Do we think that will last? Well there are reasonable grounds I would say, for thinking that this year might be a somewhat more difficult year for the consumer than was last year.”