Cloudy crystal balls

In a previous blog, Anyone got a crystal ball?, we reported on the Bank of England’s and other agencies’ difficulty in making forecasts. As the Governor, Mervyn King, said, “There is just enormous uncertainty out there.”

The Bank of England has just published its November Inflation Report. This quarterly publication gives forecasts of inflation, GDP and other indicators. It is clear that forecasting hasn’t become any easier. In his opening remarks, Dr. King says:

Continuing the recent zig-zag pattern, output growth is likely to fall back sharply in Q4 as the boost from the Olympics in the summer is reversed – indeed output may shrink a little this quarter. It is difficult to discern the underlying picture. It is probably neither as good as the zigs suggest nor as bad as the zags imply.

The Inflation Report looks at the various factors affecting aggregate demand, inflation, unemployment and aggregate supply. It is quite clear on reading the report why there is so much uncertainty.

A salutary lesson is to look back at previous forecasts and see just how wrong they have been. The chart above shows the forecasts for GDP made in the Inflation Reports of Nov 2012 and Aug 2011. You can see that they are significantly different and yet just 15 months apart. You might also like to compare the forecasts made a year ago (or even two!) about 2012 with the actual situation today. A good source for this is the Treasury’s Forecasts for the UK economy. This collates the forecasts from a range of independent forecasters.

The inaccuracy of forecasting is an inevitable consequence of a highly interdependent world economy that is subject to a range of economic shocks and where confidence (or lack of it) is a major determinant of aggregate demand. But when firms, governments, individuals and central banks have to make plans, it is still necessary to project into the future and try to forecast as accurately as possible – even though it might mean keeping your fingers firmly crossed.

Bank of England downgrades growth forecast for 2013 Daily Record (14/11/12)
A gloomy picture from the Old Lady Financial Times (14/11/12)
Will Britain’s post-recession economy be resurgent, stagnant or greener? The Guardian, Larry Elliott (11/11/12)
Economics must heed political risk Financial Times, Sebastian Mallaby (6/11/12)
European Commission autumn forecast: overoptimistic and in denial Social Europe Journal, Andrew Watt (7/11/12)
Bank of England gets long to-do list for overhaul Reuters, Sven Egenter (2/11/12)

Inflation Report, November 2012 Bank of England
Index of economic forecasts European Commission DGECFIN
Economic Outlook Annex Tables OECD
World Economic Outlook Reports IMF
Forecasts for the UK economy HM Treasury


  1. What was being forecast for economic growth and inflation for 2012 (a) one year ago; (b) two years ago?
  2. What are the main reasons for the inaccuracy of forecasts?
  3. How might forecasting be made more reliable?
  4. If sentiment is a key determinant of economic activity, how might politicians increase the confidence of firms and consumers? What are the political constraints on doing this?
  5. Explain the following statement from the Guardian article: “The problem … is that last decade’s tailwind has become this decade’s headwind.” Why is it difficult to forecast the strength of this ‘headwind’?
  6. How useful is it to use past trends as a guide to the future course of the economy?