So the UK may have already entered recession. If not, it is at least tottering on the brink. Even the official figures now confirm this.
But where were the forecasters when the seeds to this economic crisis were being sown? Those who based their economic judgement on common sense saw this coming. Those who based their forecasts on data, turned out to have got it completely wrong.
So what lesson can we draw from this?
Last week the Office for National Statistics (ONS) released its latest report on the UK’s retail sector. Bizarrely, it recorded a 3.8 per cent year-on-year rise in retail sales. Yet no one seemed convinced. The British Retail Consortium Director General, Stephen Robertson, said: “Few retailers will recognize this positive picture… we respect the ONS’s process but this report doesn’t seem to reflect the current retail reality.”
At this point you might say: “So what, the ONS data is clearly faulty, why even bother to report it?” But, in a way, that is the point. Data is often faulty. Economic data of this type surely provides no more than a guideline. Equally, one could be dubious of the ONS figures on growth. A month or so ago, it reported that the UK expanded by 0.2 per cent in the second quarter of this year. That was bad. Then last week it re-stated the figures – and this time had the economy flat in the quarter. For the first time in 16 years the UK failed to expand. The longest run of uninterrupted economic growth ever recorded had come to an end. And since records go back to a time when economic growth was much more modest than it is today, the 16-year boom was probably the longest boom ever seen in the UK – that is ever, not since the time of Henry VIII, or even when Julius Caesar first set foot on Britain in 55 BCE, has the UK enjoyed such an extended run of expansion.
But then again, the ONS data has this tendency to be revised, and then revised again, before it is tweaked, and then subjected to revision. Who knows, in ten years’ time the ONS may announce the UK expanded in the quarter just gone after-all, by which time no one will care.
But the trouble is, many economists, including those who advise the government, and who set economic policy, base their decisions on this type of data. And that fact is truly frightening.
Let’s set data aside, and ignore the strict definition of recession, and apply common sense. It is clear the UK , just like the US and most of the Eurozone, is in dire straits. The UK, by any popular definition, is in recession.
And yet, economic forecasters who have based their future projections on data from reputable sources, totally failed to see this coming.
Those who, instead, applied common sense – saw this coming a mile off.
“House prices won’t crash unless there is a recession. And there is no sign of a recession,” we were told. This publication was far from unique in pointing out that this analysis had got cause and effect the wrong way round. A crash in house prices could cause a recession.
“The debt funded economic boom would not carry on until there was recession,” they said, but the reality was that the inevitable bursting of this debt funded boom was always going to create a recession.
So what lesson can we learn? It is this, human nature does not change. It seems innate to our species to exaggerate a trend. That is why we have the economic cycle. This will never change.
The complete failure of respected economic forecasters to see this is a scandal. But it seems that the inability of forecasters to see a bubble for what it is, will also never change.
And how will it all come to an end? When will the recovery begin? Let’s put economic forecasting to one side, and apply some more common sense to answer that question. And for an attempt to answer that, read the next two articles.
© Investment & Business News 2013