What a strange year. Britain’s economy, this time last year, appeared to be on the brink of another huge disappointment. The Olympic growth boost had come and gone, leaving the outlook apparently very stodgy.
George Osborne’s deficit reduction strategy, it seemed, was turning into a deficit-increasing programme, predictions for 2012-13’s borrowing pointing to more not less borrowing compared with the previous year.
At the Bank of England, Mark Carney’s appointment had been announced but there was deep scepticism about whether a change of governor would also mean a change in policy. All the monetary levers had been pulled, it seemed, and most were not attached to anything.
The economy was moribund, as was the housing market. A eurozone collapse had been staved off, mainly by the actions of the European Central Bank, but nobody knew whether this was just the lull before another storm.
But things turned out better and, if recoveries are self-feeding, this one has gained legs as time has gone on. What was initially very tentative growth in the first quarter now looks quite convincing, giving way to stronger growth in the second and third quarters. The surveys suggest the year has ended on a strong note, providing a good platform for 2014.
People fret about the balance of growth, though the latest figures suggest net exports made a significant contribution to the economy in the first half of the year and that business investment began what will ideally be sustained upturn in the third quarter. Manufacturing, services and construction are all doing well.
Consumers have been spending more, a puzzle perhaps given the apparent continuing fall in real wages. Some figures (the Annual Survey of Hours and Earnings in particular) cast doubt on the extent of that fall, certainly this year. The squeeze on pay also looks less extreme when mitigated by the rise in the personal tax allowance.
It is also important to distinguish beween the wage experience of individuals and that for the economy as a whole. Thanks to rising employment, up nearly half a million in the past year, the overall amount being paid out in wages and salaries has been rising in real terms.
Most important has been the return of confidence, and of credit. Businesses and individuals are never cock a hoop but the current picture is less negative than for many years. The fear of falling has given way to renewed optimism.
Our view of 2013 will, of course, evolve as time goes on. And that brings me on to my annual forecasting league table, an Economic Outlook ritual for many years now, and one that was trickier than usual this year.
Let me explain. Until December 20, the consensus for growth in 2013 was 1.4%. That was the Office for Budget Responsibility (OBR) figure published alongside George Osborne’s autumn statement in December.
Then the Office for National Statistics (ONS) published a string of data revisions going back to the beginning of 2012, the effect of which will be to raise Britain’s likely growth rate this year to 1.8% or 1.9%. In the fullness of time, based on the usual pattern of revisions, 2013’s growth rate is likely to have been above 2%, and growth in earlier years will come more into line with the strong rise in employment.
For the moment, however, the question was whether to go with the stronger figure suggested by the revisions or the 1.4% we had before, and I have decided on the latter. Forecasters cannot be expected to predict the timing of the ONS’s revisions.
The other matter to clear up is about the forecasts themselves. We know that the strength of the recovery this year has taken economists by surprise – and some by complete surprise – yet in the context of 1.4% growth (if not 1.9%), forecasters did not do badly. The OBR, the official forecaster, predicted 1.2%.
Unfortunately, forecasters did not stick with the predictions they made at the beginning of the year. By spring the OBR had come down to 0.6% and the forecast consensus to 0.8%. This was the time of maximum pessimism, which gradually lifted as the stronger numbers came through.
As you will see, this year’s contest was a close-run thing. Kevin Daly of Goldman Sachs, who takes the trophy, did not join in with the general rush to downgrade in the spring, and his generally optimistic view of the British economy in recent years has achieved its just reward this year. He took the view that the economy could recover through Osborne’s fiscal tightening and was right to do so.
The only thing he did not get, and this was common to all but one of the forecasters in this year’s league table, was the strength of the job market. The majority view was that the piece of recovery would not be strong enough to make a serious dent in unemployment, but 2013 ended with both the main jobless measures falling quite sharply.
I should also mention four other forecasters who came very close this year. They are the CBI, ING Financial Markets, Oxford Economics and Lonbard Street Research. All missed out very narrowly in a photo finish. In other years, any would have won the top prize. Nine out of 10 is a formidable score.
I give an honourable mention to Patrick Minford’s Liverpool Macroeconomic Research, with its 2% growth forecast for this year, which is likely to be closer to the eventual outcome than any other forecast. Even if I had moved the goalposts to the higher growth number, however, Liverpool’s overall forecast performance would not have been quite enough to top the league this year.
Right now, we approach 2014 with forecasters much more optimistic about the outlook. 2% was a bold forecast for 2013 but is below consensus for 2014. More on this next week. Let us hope that optimism is justified.
This piece is cross-posted from EconomicsUK.com with permission.