Economic forecasts have been in the news this month……probably too much. Not since it organised a humiliating bailout of the UK economy in 1976 has the International Monetary Fund (IMF) attracted more headlines than it did in February…..or more criticism. At the heart of the criticism was a new forecast that, for the UK at least, was very unremarkable.
The IMF’s prediction of a 0.6% drop in GDP this year produced a storm of “what do they know?” outrage, particularly as it coincided with the third anniversary of Brexit.
The same day, the Bank of England announced a rise in interest rates to 4% and hinted that this could be close to the peak.
Less noticed was the Bank of England’s new forecast of a milder recession than it had predicted in November but predicting a gloomier (than the IMF) 2024. All of which is consistent with an economy that will feel flat, rather than declining sharply.
When forecasts are in the headlines, we have to get used to the “they’re always wrong” chorus from people who have no real understanding of them. Forecasts are conditioned on assumptions and getting them right has been extremely difficult recently.
At the beginning of 2020, nobody could have predicted the severity and consequences of the pandemic. A year later, when the vaccine rollout had barely started, it was hard to predict how effective it would be. This time last year, while the drums of war had started, nobody could have accurately predicted the effects of a Russian invasion of Ukraine. The events have made the assumptions look foolish (think Matt Hancock eating camel penis on live TV in a jungle).
The best way to react to economic and recession forecasts is not to shoot the messenger but accept that they convey an important general message and theme about the economy’s vulnerabilities.
The UK economy has shown itself to be vulnerable to a series of shocks, starting with the financial crisis, then Brexit, then the pandemic and the Russian invasion of Ukraine. Of these, the self-inflicted one, Brexit, is likely to be most damaging in the long run.
Well……that’s what I predict anyway.
The Numbers
With the odd exception, the tone seems to have changed over the past month. Economists have begun to admit that, while the torments the global economy is going to inflict on us this year are still likely to be rubbish, there is a faint possibility (a prediction) there will be slightly less wailing and gnashing of teeth than initial estimates forecast.
Whilst the Bank of England raised interest rates from 3.5% to 4.0% as expected, they softened their language around further hikes as the inflationary squeeze on the economy abates. There are now hopes (a soft prediction) that UK interest rates will peak at 4.5%.
This was on the back of inflation falling for the third month in a row to 10.1%. Whilst nobody will celebrate inflation running at a 40 year high, the trend suggests that the pace of price rises across the economy is slowing.
A decline in fuel prices was the main factor driving down the headline figure but this was in part offset by food inflation, which remained at a 45 year high as shortages and soaring energy bills pushed up costs for farmers and producers. The price of food and non-alcoholic drinks has risen by nearly 17% in the past year.
Chancellor Jezza Hunt, with his finger on the pulse as ever, said that while the fall in inflation was welcome, “the fight is far from over” since “high inflation strangles growth and causes pain for families and businesses — that’s why we must stick to the plan to halve inflation this year, reduce debt and grow the economy”. Why would we want 5% inflation on top of 10%......that’s 15% inflation in as many months. Surely the aim is to hit the Bank of England target of 2% otherwise why do they exist? Just a thought.
With the ‘prediction’ that we have passed the peak of inflation, are close to ending interest rate rises and a likely mild recession, the UK enjoyed a surprise rebound in consumer confidence this month. Confidence rose by 7 on the GfK index as the longer term economic outlook has the whiff of positivity.
The Rolls-Royce of indices, the Purchasing Managers Index, reading for February reached 53.0, up from 48.5 showing private sector business is returning to profit and growth (a level above 50 is good news!). That’ll be business confidence increasing also.
Just as important to the world (and UK) economy is the prospect that the US is reaching peak interest rates also as inflation appears (yep, another prediction) to be under control. This was set against a backdrop of a growth surge in jobs this month, defying fears that the US economy is heading for a downturn. US employers added 517,000 jobs last month, pushing the unemployment rate down to 3.4%......the lowest rate since 1969.
Our biggest trade partner, the Eurozone, also saw better than expected economic data and is now expected (that’ll be another prediction) to expand by 0.9% and avoiding falling into recession. As well as higher growth figures, inflation is forecast (AKA a prediction) to slow more than previously forecast to 5.6% this year and 2.5% next year.
Brexit has been centre stage this month as we reach the third anniversary, with many commentators keen to tell all how much it has cost us. The best of the researched reports (by Bloomberg) suggests it is costing the UK economy roughly £100 billion a year and the economy is 4% smaller than it might have been if the UK had stayed in the EU. Regardless of the exact amount, creating friction and obstacles with your biggest trade partner is never going to have a good outcome economically.
It was interesting to see the different reporting approaches by the press and media on the profit announcements by Shell and HSBC this month.
Shell delivered a record annual profit of $40 billion and HSBC recorded annual profits of $18 billion. Shell was battered from all angles with a “how dare they make profit” when our energy bills are going up. HSBC pretty much went under the radar yet they have manipulated the increase in interest rates to their advantage by charging borrowers significantly more and not passing on the interest rate increases to savers. Both companies are guilty of manipulating the current situation to their corporate advantage yet two very different stories have played out publicly.
Perhaps the proudest numbers of the month were saved for my 8 year old little lady for swimming 64 lengths to complete 1 mile. Why? She just felt like it!
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Trump of the Month
I got to thinking about Juan Antonio “Chi-Chi” Rodríguez this month. Chi-Chi is an 87-year-old Puerto Rican who once played golf for a living. He was very good and an eight-time winner on the PGA Tour who was later inducted into the Tour’s Hall of Fame. Yet Rodríguez is more famous for what he once said rather than anything he did on the course.
“Golf,” he claimed, “is the most fun you can have without taking your clothes off.”
I sat and contemplated this as Liz Truss wheeled out a 4,000 word interview of sorry excuses for the financial hand grenade she set off……and I thought, you’re wrong Chi-Chi……watching Lizzie is far more fun.
She instigated a brand new excuse……and I have to say I think it might be the greatest and most useful of our lifetimes. Since the moment I heard it I’ve been joyously obsessed with it. I must have used it ten times on the first day it came into my life. Even now, I still find myself triumphantly slapping it on the table during minor disagreements. Frankly, it’s so powerful that it works everywhere.
Are you ready for Lizzie’s big excuse……here we go!
“I was brought down by the left-wing economic establishment.”
Yes, since the Telegraph published this immortal headline this month, accompanying Lizzie’s 4,000-word explanation of why nothing was her fault and she is still absolutely smashing, I have been saying it on repeat like a gleeful parrot.
I know what you’re thinking……“I haven’t said this as there’s not really any suitable opportunities in my life for me to employ this caveat. It’s not really relevant to anything I do. I haven’t been brought down by the left-wing economic establishment.”
But that’s why it’s great……because……neither was Liz Truss……and yet……she said it.
There is no “left-wing economic establishment” unless Truss really believes that the Treasury, the IMF, the Bank of England, the markets, the majority of the Conservative Party and the public (with whom she registered all-time opinion-poll lows) are all closet Marxists who somehow brought about her downfall.
Even Kwasi Kwarteng admits you got “carried away” writing the mini-budget that triggered a £65 billion bailout and ruined everyone’s mortgages……and he was your best mate! My main conclusion from this is that it is important that Lizzie is never allowed to hold any sort of job that has to do with economics……or thinking for that matter.
Still. You can’t argue with the power of the mantra “I was brought down by the left-wing economic establishment”. Like a Buddhist, Lizzie’s chanting of this seems to leave her feeling serene, powerful and content. There was not one word of apology in her Telegraph 4,000 word piece.
Her confidence in herself is truly remarkable. She lasted 44 days as Prime Minister and she is already making a comeback. It might be spectacularly misplaced, wholly unwelcome and, quite frankly, astonishing……but it’s there.
The comeback, I suspect, is down to the magic of “I was brought down by the left-wing economic establishment”. Say it. Who knows what it could do for you?
A spectacularly misplaced, unwelcome and astonishing comeback……it has The Trump written all over it!
There could only be one winner of Trump of the Month for February……Liz Truss.
Trump Lunacy Rating: 10 / 10
And Finally……
“There are few things more dangerous than a mixture of power, arrogance and incompetence.”
Bob Herbert
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