Newspaper article The Evening Standard (London, England)

Why Do We Keep on Getting It So Wrong? COMMENTARY

Newspaper article The Evening Standard (London, England)

Why Do We Keep on Getting It So Wrong? COMMENTARY

Article excerpt

Byline: George Buckley

WHY do economists exist? To make weather forecasters look good, or so the joke goes. To be fair, it's been a tough job forecasting the economy since the credit crisis began. Economists have been surprised by the depth of the recession, the resilience of inflation, the scale of monetary easing and the way government borrowing has risen.

Take economic output, for example. During the preceding decade, we witnessed what has become known as the "great moderation". That is not to say we weren't buffeted by a series of international shocks (including technology booms, wars, defaults and financial crises), rather that -- on average -- we saw remarkably stable and strong economic growth.

However, since the onset of the financial crisis (which itself was born out of the excessive expansion of the previous decade), the volatility of output and inflation has increased dramatically. For example, in the decade to 2007 growth varied from plus 1.8% to plus 4.6% (around a 3% range) compared with minus 5.6% to plus 2.5% (a near-8% range) over the past year and a half.

The decline in forecast accuracy is thus perhaps not surprising. During the course of last year, economists gradually scaled back their forecasts for growth this year. Then came the Lehman collapse last autumn. This was a cataclysmic event, after which there were swift revisions for an outright contraction in output this year. Despite this, the decline in output was still not fully comprehended, such is the complexity of the financial sector and its interaction with the real economy.

Even the Bank of England -- with its army of economists and sophisticated models -- has, time after time, had to revise down its expectations for growth. Three months into the credit crisis, the Bank expected growth of 2.5% in 2009; it now expects a 4% contraction. …

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