When challenged on the Bank of England’s poor record of economic forecasting by Ed Conway of Sky News this morning, Mervyn King said:
‘This isn’t a spot the ball contest where you’re trying to hit one point on the picture. This is a question of assessing the balance of risks…
We don’t pretend to have a crystal ball to see the future. All we can do is assess the balance of risks. I think this is a reasonable judgment about the balance of risks. It doesn’t say that there will be a recovery. It says that in our central view there will be a recovery, and there are risks on both sides to that — both on the upside and on the downside.’
King’s defence is that the Monetary Policy Committee doesn’t give a single figure for what it expects growth or inflation to be, but rather probabilities of them falling within various ranges — presented in pretty fan charts. In other words, the MPC admits upfront that there’s a good deal of uncertainty in their forecasts. But, as King’s words also imply, they do claim that there is as much chance of growth/inflation coming in above their ‘central view’ as below it.
Unfortunately, recent history doesn’t bear that claim out. As the graph below shows, GDP growth has come below the central forecast made by the Bank of England a year before in every quarter bar two since 2008. On average, the Bank of England has overestimated annual growth by 2.6 percentage points over the last four-and-a-half years.
And it has similarly underestimated inflation, by an average of 1.3 percentage points:
Indeed, it’s not just in the last few years that things have gone wrong. In the whole of the past fourteen years, growth has come in below the Bank’s expectations in 38 quarters and above it in just 18. Meanwhile inflation has been above expectations 37 times and below it only 19. Admittedly, some of those misses are small, but limiting ourselves to big misses doesn’t help the Bank much. Growth has fallen short of the central forecast by more than one percentage point in 17 quarters, and only exceeded it by more than a point in three. Similarly, inflation has been more than one point above the forecast 11 times and below it by such a margin just once.
On that record, it’s hard to believe that the Bank’s ‘central view’ is indeed ‘central’ — or that, in King’s language, the downside risks are really no bigger than the upside ones.
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