The Accuracy of Economic Growth Forecasts Post-Brexit
The aftermath of the EU referendum in June 2016 has seen extensive discussions on the accuracy of economic growth forecasts. The UK's Treasury provided pre-referendum forecasts that, while mostly accurate, faltered on several key areas, including unemployment, output, and inflation.
Pre-Referendum Treasury Forecasts
According to the Treasury's pre-referendum forecasts, the UK's output was predicted to be significantly lower than what actually transpired. The Centre for European Reform (CER) estimates that the UK economy is approximately 2.5% smaller than it would have been if the UK had chosen to remain in the EU. The Treasury's most pessimistic scenario predicted a 3.5% contraction, a scenario that was notably more negative than reality. Even the Bank of England acknowledged a cost to households equivalent to approximately ￡900 in lost annual income.
Impact on Specific Economic Indicators
While the Treasury was accurate in its assessment of real wages, which have remained stagnant since the referendum, it underestimated inflation. UK inflation, as measured by the Consumer Prices Index (CPI), peaked at 3.1% in 2017, nearly 1.5% higher than in other advanced economies. This was a consequence of the reduced demand and supply chain disruptions that Brexit introduced. The Treasury also underestimated the flexibility of the UK labor market, leading to an underestimation of unemployment levels.
On a positive note, the forecast for the current account deficit was nearly accurate, with the UK current account deficit declining by 9% from June 2016, less than the 10% predicted by the Treasury.
Economic Forecasting: A Challenging Field
Across the global economic landscape, forecasting has proven to be a challenging enterprise. Most economic growth forecasts have underestimated actual outcomes. This is not surprising given the complex and often unpredictable nature of economic cycles and market dynamics. The accuracy of forecasts is further tainted by the fact that if economic forecasting was precise, markets would be efficient, and the Efficient Market Theory (EMT) would be widely accepted.
Although some argue that these inaccuracies should be accepted, the reality is that the reduction in overall prosperity due to Brexit could cost households ￡4,300, a figure that may not seem as daunting when converted into other currencies, given the ongoing depreciation of sterling.
Opportunities Amidst Uncertainty
Despite the challenges and uncertainties, it's clear that the UK has not yet realized the full potential opportunities associated with Brexit. The reduction in the social welfare state, while a significant challenge, will not fundamentally alter the economic performance if it aligns with the UK's unique domestic policies and market conditions. The UK still possesses a vast array of economic tools and opportunities that can be harnessed to drive growth and prosperity.
As such, it is crucial for policymakers, businesses, and individuals to remain informed and adaptable in the face of evolving economic scenarios. While Brexit presents challenges, it also opens doors to new opportunities and global partnerships. The key will be to navigate these changes with the necessary foresight and strategic planning.