The failure of economists to predict the future accurately is back in the news, after the Bank of England’s chief economist Andy Haldane admitted to a crisis in economics.
In a speech earlier this week, Haldane said that there was “a massive oversight” in economists’ models before the 2008 financial crisis and that such oversights could creep into forecasting since the Brexit vote.
In a world where economic uncertainty is at record highs, and the incoming president’s key tool for announcing policy is Twitter, creating economic forecasts is more difficult than ever.
That’s especially true in the UK, where the vote to leave the EU has made predicting the future of the country’s economy virtually impossible. The economy has proved more resilient than economists expected in the wake of last June’s Brexit vote and on Thursday a report from IHS Markit and CIPS described UK plc as “exceeding all expectations.”
Thankfully, economists at Morgan Stanley — now “eating humble pie” due to its failure to correctly predict the economic impact of Brexit — have compiled a list of useful economic indicators of Britain’s post-referendum economic health.
Beyond the standard, widely watched, indicators like official retail sales, pay growth, and inflation, Morgan Stanley’s team of Jacob Nell and Melanie Baker lay out a series of more obscure measures of growth.
The pair’s analysis centres around four possible growth scenarios for Britain’s economy — a gradual slowdown (their base case), a mini boom and bust cycle, a “glacial” slowdown, and sustained resilience in the face of a “Goldilocks Brexit.”
Here’s what to look out for in each scenario (indicators are in bold):
- Gradual slowdown — “The Asda income tracker for signs that price rises are really starting to bite, GfK unemployment expectations as a measure of household uncertainty that seems to have some relationship with spending.”
- Mini boom-bust — “Inflation expectations as well as household goods spending in particular for signs of shoppers bringing forward then rapidly reducing their spending on bigger-ticket items over and after the festive period. We’ll also be keeping an eye on consumer credit.”
- Glacial slowdown — Baker and Nell suggest that people should look to see “whether consumer confidence and unemployment expectations bump around recent levels rather than worsen.”
- Sustained resilience — “We’ll keep an eye on market share data, to check for signs whether consumers are responding to higher prices by shopping at cheaper chains. We’ll also be alert to survey data about people’s attitudes to Brexit and to signs of loosening credit conditions.”
And here are the charts Morgan Stanley tracks the indicators with:
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