Why gloomy economic predictions are about to be proven wrong — again
Just over a year ago, economists and commentators were falling over themselves to predict UK inflation and interest rates hitting eyewatering levels. The US bank Citi suggested annual price growth would hit 18%. Goldman Sachs suggested 20%. Even as it became apparent early in the year that this was not going to happen the world’s biggest bank, JP Morgan, suggested that UK interest rates might hit 7%. As it turned out interest rates have almost certainly peaked at 5.25%, and inflation topped out at an annual rate of 11.1%. These headline-grabbing predictions – not a victimless crime given the penal impact on the cost of capital for UK companies, and mortgages for UK households – have proven wide of the mark. The November inflation data – that revealed consumer price growth in the UK below 4% for the first time in 26 months – means the economic backdrop is increasingly supportive of interest rate cuts in 2024.
Why have we seen these mistakes in forecasting? The answer reflects poorly on the economics profession. Anyone who had taken the time to understand UK inflation would have been aware that the UK economy delayed the impact of higher energy costs through the Energy Price Guarantee. As wholesale gas prices came down – and the latest estimate from Cornwall Insight suggests a further 14% fall in April – the UK was always poised to see its inflation rate converge with that of other major economies. It is fair criticism that having been ignored over Brexit, the economics profession has rushed to put the UK on the naughty step in recent years. There has been a tendency to see all economic data through a negative lens.
The upshot of this new encouraging trend is that household spending in 2024 looks set to be considerably stronger than consensus. The Bank of England currently sees the economy devoid of growth in 2024. That looks poised to be proven wrong, again. This is not to ignore deep-rooted problems in the UK economy. Despite the encouraging inflation data, consumer prices have grown by a compound 21% since the start of the pandemic. This compares to 19% in the Eurozone and US. Brexit and elongated NHS waiting lists look more likely culprits than corporate profiteering. Doubts over the ability of the supply side of the economy to absorb even modest growth suggest the Bank of England will proceed with caution on interest rates until at least the second half of the year. But despite these challenges, the UK economy is performing rather more in line with its major trading partners than had been widely assumed. After the events of the last three years that is worthy of some festive cheer.
Published on The Times: 21/12/2023