Making economic forecasts is a tricky business but perhaps the experts who peer into the future are being asked the wrong questions, suggests James Sproule
Economists are often accused of being rather too fond of hedging their bets, giving opinions with provisos which start with an equivocation: on the one hand, on the other. As if this were not enough, getting straight answers to simple questions can be an exercise in frustration.
I often give presentations with a slide that shows economic growth – both historical and forecast. Invariably, the forecasts are straight horizontal lines stretching into the future. Any believability is undermined as I include past indicators set against what we know happened subsequently; these too are straight horizontal lines happily predicting growth, which merrily miss the gyrations subsequently felt by the real economy.
Given this scenario, why would anyone ask economists much of anything? I think the problem is that all too often they are being asked the wrong questions. In reality, economics is quite akin to medicine. You would not go to your doctor and ask if you were going to get a cold this winter – we all understand why that is a nonsensical question. What a doctor could tell you are the sorts of things that would increase your chances of getting ill. So if you stood in a field in the pouring rain in just your underwear, you might not get a cold, but you have certainly increased your chances. Similarly, we have all heard stories of aged grandparents who puffed away like chimneys until they died in their nineties of a non-smoking-related condition. You can hope to be that exception, but it is not wise to expect to be so.
So what guidance can economists usefully give? I would echo the long-time chairman of the Federal Reserve, Alan Greenspan, who said there were really only two areas where economists should opine, at least suggest, about the future. These are, to say if there were correlations between two variables – for examples, smoking and cancer, or rigid labour markets and high degrees of structural unemployment. And second, it would be to warn if there were dangerous distortions emerging in the economy (there is an irony here in that Greenspan missed the credit bubble, which grew so unsustainably large under his watch) – so, for instance, an assumption that emerging-market economic growth is going to continue apace.
With these constraints in mind, we have put together our forecast for 2016. As a start we have recounted our predictions for 2015, where we managed a respectable four out of five. Once again, just as last year, we have also given some longer-term forecasts. To see what we’re predicting for the year ahead, and beyond click here.
James Sproule is the IoD’s chief economist and director of policy