Bill Jamieson: Carney’s worst case scenario shows why soothsayers suck

Mark Carney warned a no-deal Brexit could trigger a worse recession than the financial crisis. Picture: Daniel Leal-Olivas/AP
Mark Carney warned a no-deal Brexit could trigger a worse recession than the financial crisis. Picture: Daniel Leal-Olivas/AP
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Why bother – we’re all going downhill. Given the latest outpouring of Brexit gloom – bad on all scenarios – it is a wonder anyone in business has the confidence to carry on at all.

What a miserable week it was. Dismal projections from the Bank of England, miserable forecasts from the Treasury, and from the Scottish Government a rehash of January warnings that households and businesses will be worse off under Brexit: the average Scot, it warns, would be £1,600 poorer by 2030. That’s 7.4 per cent less real disposable income, while business investment would drop around 7.7 per cent on a “no deal”.

So, amid all this it was little short of astonishing to read last week the latest quarterly review from Scottish Engineering: the sector is showing “unexpected optimism” for the coming quarter. It reports that despite a fall in exports, orders and staffing, overall optimism remains positive, with a more upbeat outlook reflected across companies of all sizes, particularly large firms, where 40 per cent reported an increase in optimism.

A rogue poll, surely – totally out of kilter with what the experts are predicting. The survey, of course, was conducted before the latest download of fateful predictions. Perhaps Scots engineers are whistling in the dark to keep up morale. Or that business simply carries on whatever the experts and pundits are predicting daily on radio and TV – because business has to do so.

For two and a half years firms large and small have had to function through a wall of gloom and foreboding about our economic prospects. A year ago this week, the Scottish Fiscal Commission warned of five years of subdued growth, with annual expansion failing to exceed 1 per cent in the years out to 2023. Growth this year was projected at just 0.7 per cent. The Fraser of Allander Institute was almost euphoric by comparison. It forecast growth in Gross Value Added of 1.2 per cent this year and 1.4 per cent next.

But both the SFC and Fraser of Allander have had to shuffle those predictions upwards. Figures for actual growth have exceeded expectations. Latest estimates by Scotland’s chief statistician show growth of 0.8 per cent in the first six months of the year and doing better than the UK as a whole. Indeed, growth over the year to June 2018 was the fastest since late 2014/early 2015. As the Scottish Government – never slow to add to the Amen chorus of gloom – was pleased to point out, the latest figures show growth in the first six months of 2018 has “been greater than the 0.7 per cent growth forecast made by Scottish Fiscal Commission for 2018 as a whole”.

Now, this growth rate is meagre compared with pre-2016 performance – and the great Brexit crunch has still to strike. And it is to the future over this precipice that both the Bank of England and the Treasury have dared to look.

Given previous forecasting form, it’s tempting to put a curse on all such predictions. But faced with uncertainty it is the most natural desire in the world to try to predict what might lie ahead. Send for the soothsayer! Forecasting is as spontaneous a reaction when having to make a major decision as the emotions of hope and fear. And in almost all instances, professional forecasts come with caveats and qualifications – though these are often presented in small print and as footnotes. When these are taken into account, forecasting could argue it deserves a better press than it gets.

But the latest wave has proved particularly controversial. The Bank has warned a no-deal Brexit could send the pound plunging and trigger a worse recession than the financial crisis. The UK economy could shrink by 8 per cent next year if there was no transition period. House prices could fall by almost a third. Interest rates would rise to 4 per cent. And the pound could fall by a quarter. If Brexit is disruptive rather than disorderly, GDP falls 3 per cent over the five years to 2022, house prices slide by 14 per cent and unemployment climbs to 5.75 per cent.

This followed a Treasury analysis that the UK would be worse off under any form of Brexit.

Criticism and qualifications have rained down. Sceptics have not forgotten that both institutions forecast in the 2016 EU referendum that interest rates would rise (they didn’t), house prices and the stock market would tank (they didn’t), unemployment would rise (it didn’t) and that the economy would go into recession (it didn’t).

The Bank now stresses that these outcomes are not a forecast but a “worst-case” projection (the least worst case having been given barely any notice). The projections “illustrate what could happen”, Bank Governor Mark Carney later clarified, “not necessarily what is most likely to happen”.

Even with this admission, the Bank has pulled off a remarkable feat, having to work out not simply one set of economic projections but multiple ones: how the economy would perform if there was no Brexit – and then a range of projections based on different Brexit scenarios.

It’s tough enough undertaking a straightforward projection for just one year ahead, let alone five. Moreover, in doing this, the Bank has made a range of questionable assumptions. For example, it assumes no transition period; no change wrought by business innovation; no adaptation by businesses on either side of the Channel to mitigate the disruption, and most remarkable of all, that a UK government would not take any countervailing measures. For example, interest rates would be more likely to be cut in the face of a projected recession rather than rise. And business taxes and rates could be lowered, even for a temporary period.

All that said, forecasts, projections and estimates should be noted, providing all the limitations and caveats are borne in mind. And there are so many potential political outcomes at the time of writing that such caveats are all the more needed. Brexit uncertainty, as can be seen from the impact on business investment, has already hit business confidence. But business – as that Scottish engineering survey reveals – has to go on through all the wrangling.