Have economists' Brexit forecasts been too negative?

Published on 07/01/2017 - 18:28

Several economists have admitted they were mistaken to predict the UK economy would immediately suffer after the vote to leave the EU.

Supporters of the United Kingdom’s decision to leave the European Union have been buoyed by leading economists’ findings that gloomy predictions over the immediate impact of a vote for Brexit were wide of the mark.

The original forecasts were made in the run-up to the June referendum while the then Prime Minister David Cameron was campaigning for Britain to remain in the EU. Many economists were united in the view that a vote to leave would soon bring bad news. “There’s no doubt we’d suffer in the short-term,” one wrote in the Evening Standard.

But last week came evidence to back claims already suggesting that several had got it wrong. A study by researchers at Cambridge University took the UK Treasury (the government’s finance ministry) to task over its assumptions which they describe as having “little basis in reality”.

Meanwhile the Bank of England’s chief economist admitted that his own institution had predicted a “sharper slowdown” in the UK economy than had materialised.

Several other economists have also come forward, saying that short-term forecasts were “too pessimistic” and “badly wrong”.

Morgan Stanley admits it is “eating humble pie” over its gloomy post-Brexit economic forecasts https://t.co/bMLNaxNyvy
— BrexitCentral (@BrexitCentral) January 6, 2017

The comments have been seized upon by Brexit supporters – many of whom have long accused the pro-EU camp of “Project Fear” scaremongering – as evidence that the British economy is buoyant and that the country is well placed to tackle forthcoming EU negotiations with confidence.

Many economists however still insist uncertainty over the long-term picture gives serious cause for concern.

What exactly did the forecasters get wrong?

Before the referendum, the Bank of England’s Governor Mark Carney warned of the possibility of a “technical recession” after a vote to leave the EU. Consumer spending was forecast to fall and in August the bank said it expected the economy to stagnate in the second half of 2016.

The recession didn’t happen: growth remained healthy at 0.6 percent in the third quarter and surveys suggest little or no slowdown in the fourth quarter either.

On Thursday the BoE’s chief economist Andy Haldane said in a talk at the Institute for Government that criticism of the bank was “fair cop”.

“We had foreseen a sharper slowdown in the economy than has happened, in common with almost every other mainstream macro-forecaster,” he added.

Are we too pessimistic about Brexit and the country’s economy? https://t.co/X4G5Bt6toH pic.twitter.com/RrwZ3ZBrEP
— BuyAssociation (@BuyAssociation) December 16, 2016

Under former Chancellor (finance minister) George Osborne, the Treasury reported last May that a vote to leave would cause “an immediate and profound shock to our (the UK) economy”, and that after 15 years Brexit would leave every household £4,300 (around 5,000 euros at today’s rate) worse off.

In its report, the Treasury also predicted that a vote for Brexit would bring an immediate year-long recession during which time inflation would rise by 2.3 percent, and that after two years GDP growth would be around 3.6 percent lower, the pound would fall by around 12 percent, and unemployment would rise by half a million.

“Writing five months after the referendum result, only one of the Treasury’s expectations has been clearly realised. This is the fall in the value of sterling,” said the economists from Cambridge University’s Centre for Business research in their now-revised report, originally written in November.

The report contrasts the Treasury’s gloomy forecast of a recession with the more recent prediction from the Office for Budget Responsibility (OBR) in November, released with the new Chancellor Philip Hammond’s Autumn Statement. “Their forecast of GDP growth of 1.4 percent in 2017 is a long way from the Treasury’s four-quarters of negative growth,” say the Cambridge economists.

Why did the economists make mistakes?

One of the Cambridge authors, Dr Graham Gudgin, told BBC Radio 4’s Today programme that the Treasury forecasts had used a “flawed application of a fairly controversial technique”, which in their view had led to wildly inaccurate estimates about, for instance, the impact of EU membership on trade. He argues that researchers should have acknowledged that economic instability meant concrete estimates were at best, guesswork.

Many economists predicted a post-referendum shock would lead to lower spending, but consumers were not deterred. It has been suggested that people were either less concerned than economists about Brexit, or – given that a majority voted for it – that their mood was more euphoric than despondent.

Economists are surprised that consumers are confident enough to spend, post-Brexit. But didn't those same consumers, um, vote for Brexit?
— Hugo Rifkind (@hugorifkind) January 6, 2017

The Bank of England’s own response to the referendum by cutting interest rates has also been cited as having helped to offset any negative impact, along with low inflation, rising real incomes and high employment levels.

It has been suggested that some of the forecasts were politically motivated – or at least influenced by an establishment view broadly in favour of Britain’s continued EU membership. Yet even one pro-Brexit economist, writing several weeks after the referendum, shared the view that the vote had triggered an economic shock, albeit a temporary one.

The economic consensus was horribly wrong and here are the real reasons Brexit is succeeding https://t.co/quW5dChMCW
— Gisela Stuart MP (@GiselaStuart) January 6, 2017

What about forecasts for the post-Brexit future?

The now-disparaged predictions covered the months following the referendum. However the UK has yet to trigger Article 50 of the Lisbon Treaty to set the formal Brexit process in motion. For now it remains a member of the European Union, and is likely to do so for another two years.

Despite the acceptance of past mistakes, many economists still paint a relatively pessimistic picture of Britain’s longer-term prospects. A survey of economists by the Financial Times at the end of 2016 found a majority had not been reassured by the UK economy’s post-referendum resilience.

There are dissenting views: Societe Generale’s chief UK economist Brian Hilliard said the economy’s resilience since June had provided “more of a cushion than I expected against the further shocks to come”.

However there are still warnings of imminent economic clouds bringing higher prices and reduced growth in 2017.

Despite his ‘mea culpa’ on behalf of the Bank of England, Andy Haldane stuck to its assessment anticipating a slowdown this year. Both he and Simon Kirby, Head of Macroeconomic Forecasting at the UK’s National Institute of Economic and Social Research, agree that the exact timing of the expected downturn is in question.

As far as the impact of the UK’s actual exit from the European Union is concerned, uncertainty surrounds crucial matters such as Britain’s future trading relationship with the bloc – not to mention the future state of the EU itself and that of the global economy.

Kirby told BBC Radio’s ‘World at One’: “we also need to bear in mind that the question about leaving the European Union isn’t a short-run question, it’s really a long-run phenomenon – so the actual important impact from leaving the European Union won’t be known for another 10, 15, 20 years.”