More bungled forecasts

I suspect regular readers of this blog will by now have guessed that the OBR and MPC are amongst my least favourite institutions. My opprobrium towards these important organisations is not the product of some iconoclastic reflex, but simply the result of their repeated failure to accurately forecast the UK economy (which is, after all, their job) and the problems we all have to endure as a consequence of that failure. Most often, as I highlighted in a blog I wrote last year, their forecasts are relentlessly too pessimistic and as a result of the slavish, rather than critical media reporting of their doom-laden expectations, we end up with inappropriate policy settings and a downbeat narrative about the economy that feeds a mood of depressed resignation.

Most recently, I was especially irritated with both organisations’ inflation forecasts, which will end up being the best part of 100bps wrong in July. But we won’t have to wait that long to know that they have once again got lost in the arcane complexity of their broken models and exercised zero judgement. For next month (data released on the 22nd of May), the MPC’s 3.6% forecast for April’s inflation rate will likely be way off. I suspect the rate will be close to 3% (up from 2.6% in March) due to the increasing energy price cap and higher bus fares, water bills and Council Tax.

Before that data release, the MPC will meet again to decide what to do with interest rates. The decision will be announced on the 8th of May. I suspect that the MPC will use that meeting (and the update it will release with its decision) to upgrade its GDP forecast, which is too low, and downgrade its inflation forecast, which, as I have already said, is way too high. The key numbers are shown below:

* Because 2024 GDP was revised from -0.1 % to +0.1% in March, February’s expectation was also revised to 0.25% in March.

So, in summary, the MPC’s growth forecast is too low and its inflation forecast is too high. (Although the OBR doesn’t provide regular updates like the MPC, its forecasts are also too low on growth, too high on inflation, and as a result, its budget numbers, especially in relation to debt interest, are way too pessimistic).

This naturally brings me to the damage being done by these two organisations’ failure to get their forecasts even remotely right. Why, for example, does the UK have base rates at 4.5%, whilst the ECB has its equivalent rate at 2.25%, despite our inflation rates being similar? Would Rachael Reeves have made the same spending and tax decisions if the OBR had been less pessimistic and more accurate with its prognostications?

We will never know, but my guess is that the policy settings we now have in the UK, especially in relation to official interest rates, are wrong. Rates should be significantly lower, and clearly, the MPC needs to get on with the job of cutting rates to get them closer to an appropriate level. I expect them to start that process at the next meeting, and maybe, just maybe, they will have the perspicacity to cut by 50bps.

Quick update on the UK

Forgive me, but I can’t resist the urge to highlight, yet again, the drivel the financial media bombard us with. Today, the FT, which has been a siren voice for the last month or so on the impending disaster that is about to unfold in the UK economy as a result of the Trump tariffs, leads with a “Confidence Hit” in its City Bulletin. The piece goes on to highlight “Awful April” and the dip in consumer confidence resulting from rising bills and Trump’s trade war, which has hit the lowest level in a year.

As an aside, I tend to ignore confidence measures and sentiment surveys in general. I find them about as useful a guide to the economy as a chocolate teapot.

Later in the article, the journalist goes on to imply that possibly ignorant UK consumers have yet to appreciate how awful everything is because, rather surprisingly, instead of falling in March, which a Reuters poll had forecast would dip by 0.4%, retail sales (actual sales rather than measures of sentiment) grew by 0.4%. Year on year, retail sales in March were up 2.6% rather than the forecast 1.8%.

This data point builds again on a series of recent UK economic data that has been consistently better than was forecast. Ironically, the article shows this better trend in a chart which accompanies the article.

Unable to resist the temptation to be bearish, the article quotes various economists who suggest that the better-than-expected sales are a product of unexpectedly sunny weather and that the grim reality of tariffs and higher bills will soon dawn, and consumers will react accordingly.

I completely disagree. Consumers are not ignorant of these challenges, but are spending because, in aggregate, their financial circumstances are much improved. Unplanned savings have boomed in recent years, and saving rates (at 12%) are very high in the UK. I expect that as interest rates fall, we will see less saving and even more spending growth throughout 2025.

Sorry, FT, I think you’ve got this wrong.