Consensus is rare these days — now that we argue about everything — but it can be useful. Consensus forecasts for the economy enable us to see what the average expectation is for the year ahead — the wisdom of the economic crowd, if you like. They also allow us to look for areas where it might be useful to aim off that average expectation.
For some years, the Treasury has performed the useful service of compiling a monthly set of tables of independent forecasters’ predictions. I think this arose from the time when it was responsible for the government’s official forecast and was criticised for ignoring what other forecasters were saying.
It is invaluable to me because I use it for compiling my own annual forecasting league table, which I shall do in a couple of weeks. It also allows us to see what forecasters — and more than 30 are included in the survey — expect.
The latest compilation, published a couple of weeks ago, showed an average expectation for gross domestic product to fall 0.7 per cent in 2023 — a recession, but quite a mild one. Around that, there was a range, with the gloomiest new forecast (made within the past three months) being a fall of 2 per cent, and the most optimistic a rise of 0.7 per cent.
A year ago, no-one expected a recession in 2023; they foresaw a continued, if modest, post-Covid recovery of about 2 per cent growth.
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There is a similar pattern to inflation forecasts. Everyone is convinced that inflation, having topped 11 per cent recently, will fall. But predictions on the extent of that fall — to an average of 5 per cent by the final quarter of this year, with a new forecast range of 2.2 to 7.4 per cent — show that uncertainty about the inflation outlook remains.
Early in 2022, the expectation was that there would be brief inflation peak last spring, after which it would fall rapidly. The cost of living crisis, which is the main factor driving the economy into recession, would have eased months ago, instead of which it intensified.
What else can I tell you about the expectations of forecasters? Government borrowing, the budget deficit, is predicted to stay very high, with an average forecast of £166.9 billion for this year, 2022-23, then £133 billion in 2023-24. For comparison, the figure for 2021-22 was £125.4 billion. This was meant to be a time of repair for the public finances, but they remain fragile.
The current account deficit — the UK’s external transactions— is put at £125 billion for this year, after £133 billion in 2022, so there is plenty of red ink there, too. I should mention the unemployment rate, which is a very low 3.7 per cent, having been down to 3.5 per cent — but it is expected to rise to about 4.5 per cent by the end of the year.
These consensus forecasts, as I say, can be very useful. They tell of a mild recession; a fall in inflation, but to some level way above the official 2 per cent target; big budget deficits; and the UK’s external vulnerability because of a large current account deficit. I think you could describe the outlook as mixed — not terrible, but not great either.
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One thing we have learnt over the past few years, however, is to expect shocks and surprises. Shocks are generally bad, and I sometimes describe the big ones we have had — the global financial crisis, Brexit and the Trump trade wars, the pandemic and he Russian invasion of Ukraine — as the four economic horsemen of the apocalypse.
There is no shortage of contenders for a fifth horseman, or even a sixth. Within government, there is concern about the use of tactical nuclear weapons by Russia, the thought of which sends shivers down the spine. An even bigger shock for the world economy, and by extension our own, would be if China, emboldened rather than deterred by Russia’s failures in Ukraine, invaded Taiwan. Senior government officials are fully aware of the economic threat this would pose to the UK, recreating many of the supply chain difficulties associated with the pandemic.
An even more direct worry is the progress of Covid in China, now that the zero-Covid policy has been abandoned. We have tended to look at China’s struggles here through the prism of its leadership’s incompetence, and the U-turn on lockdowns in response to protests. But, just as in 2020, rampant Covid in China poses a threat to the rest of the world, which is why many countries are requiring Chinese visitors to take tests. The last thing we want is for the pandemic to return.
There are also domestic threats to the economy. The Bank of England is watching the coming pay rounds very closely. Indications that private sector pay settlements are pushing significantly higher could make it take a more aggressive approach to raising interest rates. That could also lead to a larger fall in house prices than currently seems likely, the wealth and confidence effects of which could hit spending hard.
What about pleasant surprises? The cost of living crisis has been running for many months and yet the economy has so far slowed rather than collapsed. The 0.3 per cent drop in GDP in the third quarter was gloomily reported but was a pinprick compared with some of the plunges we saw during the pandemic.
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Figures suggest we have not yet seen consumers digging into the savings they built up during lockdowns (not everyone did, of course), though on a visit to one of the southeast’s biggest shopping centres between Christmas and New Year, people appeared to be spending as if there was no tomorrow. Maybe this was the last hurrah before a January slump, but there did not seem to be any shortage of money to spend, or credit cards to be tapped.
Another pleasant surprise would be if energy prices continue to ease back. European gas prices have in recent days been trading at levels similar to those prevailing before the Russian invasion, and at only about quarter of their peak last August. Lower oil prices are feeding through to reduced costs at the petrol pumps, though not as fast as the motoring lobby would like. I do not think we have ever seen a greater variation in prices, and last week I found myself paying for petrol at prices last seen in summer 2021.
As noted above, it is too soon to say that the energy shock is over, though recent developments are encouraging. When it is, one of the biggest drags on the economy will be removed.
One thing is certain: there will be shocks and surprises. We have to hope that the shocks are containable and the surprises pleasant ones.
PS
You have until close of play on Tuesday to send in your answers to my Christmas quiz, so it is not too late. I suggested two tie-breakers, either a joke or a suggestion for things I should write about this year. There have been more of the second, which shows what a serious-minded bunch you are, and gives me plenty of ideas for the next few months.
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In the meantime, I have become slightly obsessed with so-called words of the year that dictionary companies put out at this time of year. One of the words of 2022 was, of course, inflation, and we can hope it will become less prominent as this year goes on.
For one dictionary firm, “gaslighting”, as in manipulation, was a word of the year. It has a long pedigree, deriving from the play by the great Patrick Hamilton and subsequent 1944 film Gaslight, starring Angela Lansbury, who sadly died in October.
Of the other words of the year, “metaverse” will survive, but I am not sure about “permacrisis”, or at least I hope not. As for “goblin mode”, chosen by Oxford Dictionaries after a public vote, I had to look it up, which I suppose is what a dictionary is for. It is a type of behaviour that is unapologetically self-indulgent, lazy, slovenly or greedy.
Too many of our words regrettably fall into disuse, as some of these might, so I was pleased to see “slacks” make an appearance in the Times sports pages the other day, describing a football manager’s attire. Slacks have been in retreat for some time, replaced by chinos, casuals, bottoms and jeans. But there was a time when no self-respecting suburban man would be without slacks for the weekend, and, if driving, a car coat and driving gloves.
If slacks are making a comeback, that is good, but there are plenty of others. There was a time when a “snifter” was commonly used for a quick drink, and a “combo” was not a massive sandwich but, as the Cambridge Dictionary puts it, “a small group of musicians who play dance and jazz music”. Nice.
