BILL JAMIESON: Gloomy forecasts are the safest bet

Business people constantly complain at the corrosive effect such forecasts have on confidence. Barely a week now goes by without a business contact bemoaning the relentless negativity of the media on our economic prospects. Switch on the TV and its Robert Peston on the evils of the banks. Pick any pundit from the Financial Times and they’d give Nostradamus a bad name.

It is by no means a new complaint. I have heard it consistently across almost 40 years in financial journalism. But now it is particularly loud. Last week Jim “mind map” Mather, the former SNP enterprise minister, joined in the attack with a well-noted article in The Scotsman. Nothing gets more attention these days, he complained, than negative forecasts. And the vast majority are wrong.

The critique is nothing if not timely. It comes between an unambiguously gloomy forecast from our own Dr Gary Gillespie, the Scottish Government’s chief economist, and a spate of – almost certainly downbeat – projections from the Office for Budget Responsibility coincident with George Osborne’s budget on 21 March.

As if to illustrate how the exception proves the rule, Donald MacRae, economist at Bank of Scotland, is set to highlight a continuing – and strengthening – upturn in Scottish private sector employment in the bank’s business monitor due out tomorrow. The Holyrood administration loves Donald MacRae and this sighting of green shoots, playing as it does to a belief in Scottish difference.

Jim Mather’s attack is elegant and beguiling. Many will sympathise with its broad thrust. And few will dispute that the reputation of economic forecasting has been battered with the global financial crash. This swept almost all forecasts, government and private, and many reputations off the table.

But it is a mistaken critique. And in some particulars it is dangerous.

Take the sweeping statement that the vast majority of downbeat forecasts are wrong. Some were too optimistic. Last year began with a broad consensus across the forecasting profession that the modest 2010 recovery would continue and the economy would see growth of between one and 1.5 per cent.

As matters turned out, this consensus was too optimistic.

Last year was characterised by a near continuous downgrading of these forecasts. There was also a brutal slide on the stock market in the late summer as investors woke up to the seriousness of the Eurozone crisis and the realisation that we might be headed into a second recession. Both the OBR and the Bank of England slashed their predictions.

Here in Scotland the Fraser of Allander Institute and Ernst & Young lowered their forecasts as the year progressed – the FoA most recently to a prediction of GDP growth in Scotland of just 0.4 per cent in 2012 – and a continuing rise in the jobless total.

All this received media attention, not out of some perverse sense of news values but because these were important corrections to previous forecasts and ones with implications for the aspirations and livelihoods of millions of people.

They were also newsworthy because of their potential consequences for economic policy and budget planning. Whether the forecasts were private or official mattered less than the fact that the world was changing and assumptions about recovery were being revisited.

Was the press at fault in covering these changed predictions? Negative or positive, whatever it is, journalists will report material from business confidence surveys through retail sales and export orders to GDP forecasts – the news that is likely to fire politics – and move markets. Demand for such material is relentless – equivalent to that insatiable, all-devouring engine in Zola’s La Bête Humaine. We don’t invent it. We only report it.

Mr Mather went on to make a broader, more philosophical point. He cited a book called Future Babble and its thesis that the human predilection for gloom is the result of “negativity bias”.

Oh, really? Is there not an equal and opposite human predilection, and one much commented on in the many books setting out to explain the 2007-09 global financial crisis – “optimism bias”?

The tendency to expect the optimal outcome – whether in business ventures, stock market investing or slicing and dicing sub-prime mortgage debt – has constantly humbled us. Indeed, the single common factor in the root causes of financial panics and crashes has been that all-too-human capacity for optimistic deception. Once reality sets in on that exuberance, the correction is swift and painful. The delusions of “this time it’s different” or “the end of boom and bust” have caught out markets and economies through the ages. Hope may be the enduring spur of life. Reality can be the crushing boot.

Warming to his theme, Mr Mather goes on to assert that the experience of successful people, communities and countries “is categorical: accurate forecasts are not necessary for success and good decisions.”

Anyone who seriously believes this has either lost his mind map or suffered some industrial accident. It is certainly true that much business success can depend on luck. Businesses can rise above and confound the bleakest macro economic clouds. But it is equally true that many more businesses have foundered on poor forecasting, inadequate research and blind defiance of probability. Whether it is the future course of inflation, oil prices, interest rates, household demand or government spending, while forecasting these variables is far from perfect, business and consumers crave some guidance on likely movements and trends. Business planning has to be more than a series of shots on a pinball machine or a pull on a one-armed bandit. And we can do better, surely, than ra-ra sing-songs round some motivational camp fire.

Not all forecasting is gloomy and negative; not all forecasting is inaccurate; and not all forecasting is useless. That said, Mr Mather has provided a useful and timely corrective, both to over-reliance on forecasting and under-appreciation of the achievements of business and entrepreneurs despite the darkest predictions. Meanwhile, groups such as the Power Lunch Club vitally underpin business confidence and morale.

Three years ago, in the depths of recession, I was tasked to address a group of business people on the subject “Where are the Aces to be Found?” That the public meeting was in Glasgow filled me with extra foreboding. But as it turned out, there were many examples I was able to cite of Scottish firms that were doing well and others that were investing and expanding: the micro can trump the macro.

The official forecasts at the time were uniformly hopeless, such was the place we were at in the business cycle. But my belief then – and now – is that the cycle turns. Back in 2009 it duly did, with a strengthening recovery through the second half of the year and into 2010.

The business cycle, driven by innovation, adaptation, entrepreneurship and the constant human yearning for improvement, will turn again. And that is a firm forecast I am sure Jim Mather will fully share.