Sir Mervyn can't be pleased. The MPC is in a hole.

As in the US, growth forecasts were wrong all along.

By David Blanchflower Published 05 October 2011 19:38

There were a lot of very embarrassed members of the economics staff at the Bank of England, this morning. They messed up and it is certain that Sir Mervyn was not pleased, as now the MPC is in a hole. More of that in a minute. First, we need some background.

The Bank of England has put a good deal of resources into trying to understand the patterns of revisions to data in general and to GDP quarterly growth data in particular. Growth numbers are published by the ONS and then are revised over time as more data becomes available. So, not only is there uncertainty about where the economy is going, but also about where it is currently and where it was before. Over the past year or so, the MPC has based its forecast to growth and output not so much on the official ONS data but on what it thought it would end up being once it had gone through a revision cycle.

So, here is the latest forecast of the MPC taken from its August inflation report (2011). Everything to the right of the dashed vertical line is the forecast and the green lines are the 90 per cent confidence interval, which widens as the forecast moves further into the future. To the left of the line is the backcast, which also has error bands on it showing that it is measured with error. The black line shows the official data from the ONS. The fact that the green lines are mostly above the black line means that the MPC was expecting the data to be revised up. It didn't turn out that way.

[MPC's GDP projection based on constant nominal interest rates at 0.5 per cent and £200bn asset purchases, August 2011]

The table below shows the old data and the new data. A few facts stand out. First, the extent of the decline in output in 2008 and 2009 was greater than was previously thought: that output fell by 7.3 per cent between 2008 Q2 and 2009 Q2, compared with 6.6 per cent, as previously estimated. Second, the fall in output now appears to have stopped in 2009 Q2, rather than in 2009 Q3. Third data for 2008 Q3 has been revised down substantially -- recall that the first release was + 0.2 per cent. Finally, output over the last three quarters did not grow at all compared with the 0.2 per cent previously estimated.

Hence the staff and the MPC got it wrong and have collective egg on their faces. So did a number of others including Gavyn Davies, who in his blog article "Anglo Saxon GDP not as weak as it appears" argued on 1 May 2011: "It is quite likely that UK real GDP growth in the past two quarters will be revised up markedly from the zero rate which is currently estimated." Andrew Sentance has continued to argue that one of the major problems the UK faces is inflation, because the recession was much weaker than previously thought and the recovery much stronger. As ever, his analysis is negatively correlated with the actual outcomes. Kevin Daly from Goldman Sachs also claimed on 24 April: "Despite the uncertainty about the future, the UK's growth performance in the recent past has been better than is commonly portrayed." Wrong, chaps, sorry.

This is almost exactly what happened in August 2008, when the MPC failed to see the recession, because it assumed the back data would be revised up but, in the end, they were revised down. The MPC's forecast is now going to have to be lowered even further, bringing it closer to that of NIESR, which has been very bearish -- and on the basis of these numbers, they are likely to lower their forecast even further, according to Simon Kirby.

This means that the MPC has no alternative but to do more QE at its meeting tomorrow, proving Adam Posen has been right all along. The MPC can't afford to wait until November. I suspect also that some heads will roll at the Old Lady of Threadneedle Street -- and so they should. Embarrassing.

	OLD	NEW
2007 Q1	1.0	1.1
2007 Q2	0.6	1.2
2007 Q3	0.5	1.2
2007 Q4	0.3	0.6
2008 Q1	0.5	0.0
2008 Q2	-0.3	-1.3
2008 Q3	-0.9	-2.0
2008 Q4	-2.1	-2.3
2009 Q1	-2.2	-1.6
2009 Q2	-0.8	-0.2
2009 Q3	-0.3	0.2
2009 Q4	0.5	0.7
2010 Q1	0.4	0.2
2010 Q2	1.1	1.1
2010 Q3	0.6	0.6
2010 Q4	-0.5	-0.5
2011 Q1	0.5	0.4
2011 Q2	0.2	0.1

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17 comments

Thu, 2011-10-06 12:51 — mike555

QE, another short term fix? It should give the bankers bonuses a nice boost, and help prop house prices up at unaffordable levels. Anyone remember how we got in this mess?

I remember hearing when QE was first started that it will have to be withdrawn at some point, when is this likely to be?

Thu, 2011-10-06 12:52 — Paul Hillyard (not verified)

Anything which gets lending to the SME sector easier is worth considering but I can't see how it will be quick enough or big enough to make a material difference in the next twelve months.

All the government backed lending schemes I've dealt with like the Small Firms Loan Guarantee Scheme are mired in red tape and expensive. The banks tend to use them where lending is a marginal decision and it covers their backs.

Very few details from Osborne and a kick off in December means its half hearted conference feed.

Fri, 2011-10-07 22:42 — matthew fox (not verified)

House prices being propped up, mmmmmmmmmm, sounds very unfamiliar.

Fri, 2011-10-07 11:52 — Jo (not verified)

Blanch,

Hope you well.

Yes its me again with the same question:

What is your advice to the UK government in depression economics post this 75bn and the final 50bn in 6mths. No need to gloat it was obvious that Ozzi would eat his words but surprised how conservative Merv dived in (worse since 1930s or ever!!!!).

Yes you won your war of words, now youve been trounced as the 2 gents are now ahead of your curve. Merv with his 1930 comment is covering his backside ie told you so and Ozzi has proved himself a JOKE. Now Blanch after this and the next QE fail (also risking a UK downgrade) please comment on the DEPRESSION coming and how you would see it unfolding....yes you won the playground stuff as I pointed out weeks ago, now for some adult forcasting????

Fri, 2011-10-07 12:09 — Dave C (not verified)

Prof. Blanchflower was on Newsnight last night: http://www.bbc.co.uk/iplayer/episode/b015pqvs/Newsnight_06_10_2011/

Thu, 2011-10-06 17:29 — mike555

I don't see as this proves anyone right, it's just the easy route out in the shrot term. The price will probably be higher inflation, and even less incentive for people to save and behave responsibly with their finances.

Mon, 2011-10-10 11:49 — Andy A (not verified)

"As ever, his analysis is negatively correlated with the actual outcomes." You won't be on Andrew Sentence's Xmas card list that's for sure. Very funny though

Wed, 2011-10-05 22:16 — frances smith (not verified)

but, but, but, but. the ons collects statistical data, and then it realises a figure, on the basis of the early data collected, and then when it has more, it releases revised figures. its statistics, why would there be a pattern of behaviour in numbers, they are numbers not human beings, they aren't even chemicals, so that you can guess what might happen if you combine them. there is no good reason to assume that because the figures are revised in one direction one month that this is an indicator of a trend. this is seriously ocd. sack the lot of them.

Wed, 2011-10-05 23:24 — Awake!

Frances
the man said it in his piece (sigh). 90% confidence limits...
Interesting and informed mr Blanchflower.
Also, it must be pleasing to see osborne adapting your idea to lend direct to business from govt coffers.

Thu, 2011-10-06 17:23 — Eddie-G (not verified)

"Adam Posen has been right all along" should be the Bank's new motto or slogan. Someone could perhaps graffiti the same slogan in Cabinet offices. Maybe then he will be actually listened to, rather than treated as the nerdy cassandra on the MPC.

Important to remember too that not only has Posen been right all along, he promised earlier this year he would resign if he were proven wrong. It's a shame certain others didn't promise likewise.

Wed, 2011-10-05 23:39 — David Blanchflower1

Awake
Thanks for the kind words - credit easing is a step in the right direction! The fan shows the 90% confidence interval as you rightly say.

I just hope the MPC votes with Adam Posen tomorrow and starts a new QE2 programme.

Danny Blanchflower

Thu, 2011-10-06 00:56 — T Andrews (not verified)

And when that happens, can we raise Adam Posen to some kind of sainthood level? Spot on analysis. Brave. Against the flow and general noise of Sentance and the other hawks for the last 12 months or so...and, unlike Sentance et al, humble with it. Excellent interview with him i read 6 months or so ago where he said he would resign if he were proven wrong.

Thu, 2011-10-06 09:39 — Peter (not verified)

The recession is the result of everyone taking on too much debt. We now need to get that out of that system. Ultimately that means we need to build up our savings. QE and rate-cutting are at best a distraction and at worst a positive hindrance to this process. Mr Blanchflower and others can't think beyond the debt based model of economic growth. The system is clearly on the point of utter collapse and new thikig is now needed.

Thu, 2011-10-06 09:47 — swatantra nandanwar

Lord Myners has said the British economy is a bit more resilient than Greece or Italy.
Dave should give lessons on Debt Management to Papendriou and Berlusconni, and teach them how to live within there means.
But if those two go down they'll take us with them.

Fri, 2011-10-07 18:19 — mike555

Once the short term boost we get from QE2 runs out why don't we just go the whole hog and force savers to hand over their hard earned savings to pay off the debts of the reckless borrowers?

Thu, 2011-10-06 10:45 — Awake!

Peter
I do agree with you, but i don't see judicious lending to UK business from govt coffers as the same as 'fiscal stimulus', rather a genuine solution to the problem of broken banks, who after all are supposed to efficiently allocate resources in our economy. These loans or bonds will be against some assets of the company and if judiciously managed will be sustainable loans, indeed profitable? Debt is a bona fide solution to a problem, it's only been tarnished by crazies who when asked to repay start blabbing about Marx, lennin and a revolution- in truth they're just cheats. You are right, new thinking is needed, so rather than govt stepping in to pump aggregate demand a la old school, the new idea here is govt buying bonds from SME's.
Most people on this forum are 'foaming at the mouth rabid old school debt junkie lefties' who will soon have o move onto SWP or EDL forums cos that's the level of their intellect, and when labour finally realises this it will boot them out (laterz balls). They are always blabbing about the small guy but won't say a word about the way the eurozone is crushing the small guy, or how Brown and balls disaster has massively benefitted big business relative to small guys. Look at the way large corporates can access debt mkts at 1%, yet a company of 10 people can't borrow 10k. The eurizone debacle carrying on and on, so small guys run out of money and fold, the big guys scooping the spoils- but not a PEEP out of the left- SHAME ON YOU!!!
Keir hardie woudn't let u drink soup from his kitchen... bunch of cry babies