Economic forecasts are almost always wrong – so why do we take them seriously?

There is a weird psychology behind economic forecasts. We know they are going to be wrong, because they always are. Yet such is our appetite for information – any information – that nevertheless we can’t stop ourselves taking them seriously.

The Sunday Times this morning has gone big on a report by serial doomsayers the EY Item Club claiming that the government needs to move quickly to obtain a transitional deal on Brexit or face a collapse in business investment. Even with a deal it predicts that the growth in business investment next year will fall to 1.5 per cent, from 2.1 per cent this year.

Maybe. But then again, maybe not. There is absolutely no evidence from previous EY Item Club forecasts to suggest that this is better than a figure plucked out of the sky. In July 2016, for example, just after the Brexit vote, it revised its forecast for economic growth over the course of 2016 from 2.6 per cent (which it had made in April 2016) to just 0.4 per cent. That would have meant the economy shrinking significantly in at least one of the last two quarters of 2016. The outcome? The economy grew by 1.8 per cent over the course of 2016. The EY Item Club also predicted, at the same time, that unemployment would swell from 5 per cent to 7.1 per cent by the end of 2019. That is still over two years away, of course, but there is little sign of it coming true so far – unemployment has since fallen to 4.3 per cent, the lowest in over 40 years.

Further back, in January 2012 the EY Item Club predicted a recession which didn’t happen. In January 2013 it forecast that the economy would grow by only 0.9 per cent in 2013 unless the government changed its economic policy and increased borrowing. In the event, the government didn’t change its policy but that didn’t stop the economy growing by 1.9 per cent in 2013.

Really, you might as well read Old Moore’s Almanack for a guide to the future performance of the economy. But that won’t stop respected news sources from reporting the EY Item Club’s forecasts as if they were objective fact.