Ivan Fallon: Economists got it wrong this year. I’m glad they did

As the economist Roger Bootle remarked the other day: 'As a result of yet more forecasting failure, economics has probably never before been held in such low esteem' and has lost any claim to be being regarded 'as a scientific pursuit'.

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More than six months have passed since the British referendum and, amazingly, the UK economy is still going strong.

The latest official figures, released just before Christmas, record positively rampant consumer spending in the autumn and economic growth of 0.6 per cent compared to the Treasury and Bank of England forecasts of zero.

Britain was supposed to be in recession by now. But it is not and it does not look like going there any time soon.

In the United States, Donald Trump’s election has not resulted in disaster either.

All major Wall Street indices hit record highs in December, which was also not supposed to happen. But then lots of things were not supposed to happen this year.

Just think back, if you can, to where we were in January. The first 10 trading days were among the most brutal investors have ever known, the worst start to a new year on record.

Global equity markets lost more than US$4 trillion of value and the news from China, where the economy looked as if it were about to fall off a cliff, suggested that was just for starters.

Commodity prices, particularly coal and iron ore, dropped to historic lows, bringing some mining shares down by 90 per cent.

The bond markets were savagely whiplashed by the conflicting forces of central banks selling reserves to support their currencies and investors rushing for safety.

The Bank of Japan further shocked the markets by embracing a policy of negative interest rates, causing bank shares, which had never recovered from the 2008/9 financial crisis, to plummet. Oil hit US$27.10 a barrel in the third week of January, causing huge dumping of shares and bonds, particularly those of the junk-rated American shale-drillers.

The oil companies reported trillions of dollars of capital investment cancelled or postponed.

There was a serious fear that all this market disruption would feed through into the real economy and create a new world recession before the last one was properly over.

Yet all of that has faded in memory against the twin events of Brexit and Mr Trump’s election, whose consequences are still to come.

The markets stormed back, oil is above $50 a barrel and the FTSE 350 Mining Index has climbed by 95 per cent this year.

Anglo American and Glencore, two of the world’s biggest mining groups, have risen by 300 and 200 per cent, respectively. How we all wish we had foreseen that (I met a man recently who said he did – but then he used to work for Anglo).

So here we are at the end of the year with the UK economy growing like gangbusters (well, almost), US share valuations at record levels, the Chinese economy back on track, oil looking healthy and a bit of growth back in the European economies.

That looks a lot better than we might have expected back in January.

Or in June. Or even November, after the US election.

Who can blame the forecasters for getting all of that wrong? As the economist Roger Bootle remarked the other day: “As a result of yet more forecasting failure, economics has probably never before been held in such low esteem” and has lost any claim to be being regarded “as a scientific pursuit”.

I am glad I did not know that when I was studying economics half a century ago.

So what we can forecast with some certainty in 2017 is that the forecasters will be wrong again, events will come along out of the blue as they always do, and that somehow life will go on.

A prime example is the Italian banking crisis where the government bailout of Monte dei Paschi di Siena has actually happened, but the crisis is far from over.

The move has set the hares running in Germany, which is determined that the rescue should not set precedents that could be exploited by other banks to avoid the full force of EU regulations.

It also adds to Italy’s debt pile, already 133 per cent of GDP, the highest in the euro zone after Greece.

And unless Italy’s struggling economy also improves, the bailout’s success is far from certain.

Similarly, the issues over Deutsche Bank, which reached a $7.2bn deal with US authorities, which included a $3.1bn civil penalty, have still to play out.

One can think of another dozen scenarios that could tip a delicately balanced economic and political world over the edge in 2017.

I do not see any point in that – surprises will still happen.

Personally, I am grateful to be where we are.

The biggest surprise of 2016 is how well it is ending.

Ivan Fallon is a former business editor of The Sunday Times and the author of Black Horse Ride: The Inside Story of Lloyds and the Financial Crisis.


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