Incredibly, I have been involved in preparing forecasts of the UK economy for 45 years. I have a reputation for making bearish calls – occasionally successfully – but have never produced, or agonised over, a forecast as terrible as the one below. We now expect UK GDP to fall by nearly 11 per cent this year, employment to drop by 8 per cent (notwithstanding the Job Retention Scheme) and public sector net borrowing to climb to £110bn. The forecast error margins are very wide and we will take an unusually keen interest in the next Consensus Economics publication to see how differently others perceive the outlook, not just for 2020 but also for 2021. What is the shape of things to come?
Any attempt at assigning magnitudes to economic variables, even in the near future, is liable to attract ridicule but I maintain that the production of forecasts is an essential activity for professional economists. Rarely, but significantly, we demonstrate an understanding of the interplay of forces in the forecasts we craft. More frequently, our projections reveal our misunderstanding of such forces. And on the few occasions that we hit an outturn on the nail, it is the fortuitous cancellation of errors that delivers our prize.
We forecast not to enhance our reputations nor to assert our prescience: we forecast out of ignorance but in search of understanding. Behind an unwillingness to forecast is an unwillingness to think deeply about the future and how it will differ from the present. Forecasting is a vital form of mental exercise for all applied economists.
At such a time as this, we must begin with shapes. I have created some crude representations of the potential paths of output and the price level in figures 1 and 2. Please forgive the artwork. These are pure guesses of course, and there are plenty of credible variants. However, the temptation to nuance these paths with additional lumps and bumps should be resisted every bit as much as forecasting to the second decimal place.