LONDON — One of the Bank of England’s most senior policymakers has acknowledged that the central bank is unlikely to predict the next financial crisis or even the next recession in the UK because economic models are simply not good enough.
Speaking to the House of Commons’ Treasury Select Committee (TSC) on Tuesday, Monetary Policy Committee member Gertjan Vlieghe told MPs: “We are probably not going to forecast the next financial crisis, nor are we going to forecast the next recession. Models are just not that good.”
Vlieghe was addressing questions regarding recent comments from the Bank of England’s chief economist Andy Haldane likening the failure of economists to predict the 2008 financial crisis to Michael Fish’s weather forecast on the eve of the Great Storm of 1987. Haldane also appeared in front of the TSC, alongside BoE Governor Mark Carney and fellow MPC member Ian McCafferty.
Vlieghe told the committee: “I’m never confident of any forecast, and I think the big thing that we risk missing here is that every time there is what we call a forecast error — which means the outturn is different from the central projection — to think that ‘Well if only we’d had a better model we wouldn’t have made that forecast error.’ That kind of attitude is going to lead to persistent disappointment.”
A significant portion of the TSC hearing focused on Haldane’s now famous Fish comment, as well as broader issues with economic forecasting — something that has come to the fore in the UK since economists were almost unanimously wrong in their predictions about the immediate impact of Brexit on the British economy.
Many pre-referendum forecasts, including those from major banks, argued the UK would enter a recession this year on the back of Brexit uncertainties. These predictions are now dead in the water thanks to a slew of better than expected economic data.
Haldane had previously said that economic forecasting could be improved by using more data, just as weather forecasting has improved in the 30 years since the 1987 storm. While Vlieghe acknowledged Haldane’s point, he was clear that forecasting will never be perfect.
“I completely agree that when there is a forecast error we need to learn from it, we need to make sure we’re exploring all available data, we’re not locking ourselves into thinking we’re in an economic structure that is no longer applicable,” he said. “Even after we do all that, there are still going to be large forecast errors.”