Are downbeat economic forecasts self-fulfilling? Are we more depressed about the economy than we need to be?
Seldom has a year begun with such an array of miserable predictions for the year ahead – and beyond. And surrounding them has been a widespread mood of apprehension about what the future holds, evident across business, households and politics.
Such predictions may also be working to amplify the very outcome that they forecast.
Tomorrow sees the arrival of “Blue Monday” – the day widely thought to be the most depressing of the year. But now Dr Cliff Arnall, the man responsible for the Blue Monday formula, regrets making the day become so negative, and admits that the very designation has made it worse. How ironic that he describes himself as a “life coach and happiness consultant” – equivalent to being a warm-up comedian at a funeral home.
Now, we can hardly blame economists for making depressing predictions. It’s their job to tell it how they see it. And generally they work hard to try to make their forecasts as well-researched, objective and “scientific” as possible.
But economists themselves are prisoners of wider circumstance. They have not been beamed down from a distant planet. They live and work in the same atmosphere as the rest of us. And their judgments cannot but be affected.
The new year has limped in under dark clouds, the most notable here being the forecasts of our new Scottish Fiscal Commission, set up to provide independent and objective assessments of our economy, similar to the work undertaken by the UK-wide Office for Budget Responsibility.
Its report on Scotland’s Economic and Fiscal Forecasts ran to 224 pages and was intended “to inform” the Scottish Parliament’s discussion of the draft Budget. Its main conclusions were well covered – and deeply pessimistic. It forecast average annual growth of less than 0.9 per cent a year out to 2022 – about half the long-term historical average of two per cent a year. Growth of just 0.4 per cent in 2016 is predicted to rise to 0.9 per cent in 2019 and fall to 0.6 per cent in 2020 before rising to 1.1 per cent in 2022.
This assessment was met with widespread lugubrious nodding of heads and with little challenge. And why would it not, echoing as it does the all-pervasive Zeitgeist of pessimism?
Little wonder that the Federation of Small Businesses recently reported that confidence has slumped, with Scottish firms still markedly more pessimistic about their prospects. After all, when presented with such depressing forecasts, what chance is there for the “little platoons” to raise their heads above the parapet?
So it was startling to read a dissenting letter fired off last week by the economist, Tony Mackay, to Dame Susan Rice, the SFC chair. It runs to seven pages and questions the SFC forecast and assumptions on a broad range of fronts.
Its most searching attack is on what he sees as the failure of the SFC to explain not only why its forecasts are more pessimistic than those of independent forecasters but also why the Scottish economy is scheduled to perform notably worse than the UK overall.
For example, the SFC compares its forecasts with the “official” ones of the Scottish Government and also those made by the OBR (neither of them, incidentally, noted for outstanding accuracy). The latest Treasury report shows estimates of 1.8 per cent growth in UK GDP in 2016, falling to 1.6 per cent in 2018 and 1.4 per cent in 2019 – all more than double those of the SFC. The Fraser of Allander Institute forecasts 1.4 per cent growth both for this year and next, while accountants EY predict 1.4 per cent this year and 1.6 per cent next – both well above the SFC prediction. As for Mackay – no apologist either for “happiness economics” or the Scottish Government’s economic analysis – his forecasts are for growth of 1.5 per cent for 2018 and 1.7 per cent in 2019, or double those of the SFC – breezy optimism on a scale North Korean cheerleaders and pom-pom shakers can only envy.
Why, he asks, is the SFC more pessimistic about the Scottish economy? Its report cites lower growth from construction and from labour market growth, a falling savings ratio and declining support from the oil and gas industry. Future downside risks, it adds, include the UK’s changing relationship with the EU, “a weakening outlook for global trade, Scotland’s industrial and demographic structure, and weak onshore demand linked to activity in the oil and gas industry… In combination, this means limited increases in average earnings and a more modest outlook for employment growth in the coming years compared to the recent past.”
But important though these variables are, they are not, Mackay argues, as important as the SFC assumes. “The analysis of the employment and productivity variables is flawed, and there is a poor analysis of the importance of exports to the Scottish economy. Further, the analysis of the contribution of the North Sea oil and gas industry to the Scottish economy is superficial and includes a number of errors”. The worst of the downturn, he argues, may now be over. Overall, the economic analysis in its 50-page chapter on the economy “is poor and the main conclusions and forecasts not justified”.
It’s a cogent and well-argued critique. And some support for his charge that low labour productivity has been over-emphasised may be drawn from subsequent recent findings that productivity picked up in the third quarter to record the best performance for six years. This rebound, says EY, “suggests that some of the first half 2017 weakness in productivity may have been cyclical… The indications are that productivity likely saw further improvement in the fourth quarter.”
And forecasts for the North Sea oil and gas industry require caution in the light of the recent marked volatility in the oil price, now nudging $70 a barrel or 50 per cent up since the summer, helped by strengthening global growth – and rising global trade.
Meanwhile ONS figures last week showed UK manufacturing output grew by 0.4 per cent in November, with annualised expansion in the three months to November at 3.9 per cent, the most rapid since March 2011.
Few wish the charge of over-optimism. But the current pessimism needs some qualification. Talking us down unnecessarily risks making it more likely.