Autumn Statement: Are OBR And IMF Growth Forecasts Reliable?

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The Office for Budget Responsibility (OBR) slashed it's forecast for growth on Wednesday as the Chancellor, George Osborne, warned that austerity could last all the way to 2018.

The OBR is an independent body set up by Osborne and it's role is to advise whether the Government's fiscal policies will meet their targets.

Slashing forecasts sounds dramatic. But what does it mean? Is this the first time they've been slashed? Should we be worried?

Well, kind of. Whilst they are indicative of a faltering economy, the revised forecasts were to be expected. Here's why:

final2

This graph shows OBR predictions for UK growth. Predictions for 2010 are blue, 2011 are red and green for 2012. The two right at the end show the actual growth for 2010 and 2011.

There isn't a green one because obviously we don't know that one yet.

In theory, all the blue ones should be the same, all the red ones should be the same and, you guessed it, all the green ones should be the same.

This would mean that the OBR's predictions were all right, and perhaps more importantly, consistent.

But they're not.

They are very, very different.

2010 was spent upgrading forecasts, and even then they didn't get it right in the end.

2011 and 2012 saw downgrade after downgrade. And that green one in between March and November 2011 is really, really big.

So today's slashed forecast isn't unique. In fact it follows the pattern set by previous growth forecasts.

Robert Chotes, head of the OBR, told the Independent there "aren't many people" expecting growth to reach the 1.7 per cent forecast back in March.

What can be inferred is a general trend but even this isn't totally accurate. 2011's figures show a downward trend yet the actual growth was slightly higher than the November forecast.

But just so we can't be accused of OBR bashing, here is the same graph based on IMF figures.

imf5

The inferred trend from this is even more worrying as that little one on the end is hanging upside which signifies negative growth.

So, what does this all mean?

Well basically, growth forecasts are almost never right.

At the beginning of the year they are wildly out but by the end of the year they are more accurate. However, seeing as you have more data available and the benefit of hindsight this is to be expected.

In conclusion, growth forecasts are reliable but only for a single month ahead.

Which is not really much use.

Thanks to Schroders, Investec Asset Management and Duncan Weldon for assistance

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