BRIAN EASTON: Fans for forecasts

We are going into the budget season when economic forecasting becomes especially prominent. There is a huge gap between how professional forecasters think about the exercise and how the commentariat treats forecasts. Here are some insights into the way those forecasters think, even if it is boring compared to what is in the public rhetoric.

The usual forecast is a point estimate; say, ‘consumer prices are going to rise X percent in the next year’. However, the professional forecaster is thinking that there is actually a range with the X in its middle. The range is often large.

I illustrate this with a fan graph of consumer price forecasts from the most recent Bank of England Monetary Policy Report(February 2023).

Let’s focus on the one-year-out forecast. It was widely reported that the Bank expected consumer prices to rise 3.9 percent in the year to December 2023. But that is not actually what they thought.

 

The graph shows what they thought. The 3.9 percent is only the mid-point of their expectations. In the Bank’s Monetary Policy Committee’s best collective judgement that if economic circumstances identical to today’s were to prevail on 100 occasions, in 60 of those occasions consumer prices would rise between 2.0 and 5.0 percent; on the other 40 occasions it would rise outside this range.   

Continue reading “BRIAN EASTON: Fans for forecasts”

Don’t expect too much if we get negative interest rates

Are central bankers jealous that epidemiologists are the rock stars of the current crisis?

There is talk that both the British and New Zealand central banks might institute negative interest rates as part of the policy response to the Covid shock.  Continue reading “Don’t expect too much if we get negative interest rates”

Brexit: concerns about reduced economic openness and lessons from NZ’s terms of trade

LONDON CORRESPONDENT:  The UK’s central bank, the Bank of England, last Wednesday published a series of gloomy Brexit scenarios.  Supporters of Britain’s departure from the EU erupted in fury – but accusations of bias and bad faith miss the point. While civil servants do their utmost to avoid telling lies, ignoring, obscuring and arguing from carefully selected premises are part of the stock-in-trade.  Behind the politically chosen scenarios, the analysis is revealing and helpful to reasoned argument from all camps.

The scenarios modelled run from close economic partnerships (a version of which is currently before Britain’s parliament), through transition to World Trade Organisation trade terms, and on to a no-deal/no-transition ‘hard Brexit‘.  All of them suggest that the UK’s economy would be smaller over time than if the UK had remained in the EU, up to 10% smaller in the most dire, disorderly Brexit scenario.

The basis of the bank’s modelling (affirmed throughout the report’s 86 pages) is the assumption that all of the scenarios lead to a less open, and thus less productive, UK economy.   The economic literature is abundantly clear that openness to trade in goods and services and to foreign investment, facilitates competition, innovation and specialisation, and thus productivity.  QED one might say. Continue reading “Brexit: concerns about reduced economic openness and lessons from NZ’s terms of trade”