The OBR’s downbeat forecasts for the economy have caused Brexiteers to question its competence. For example, Iain Duncan Smith says it has been “pretty much been wrong on everything.” Such attacks miss two important facts.
Fact one is that there is a crucial difference between unconditional and conditional forecasts. A conditional forecast is the sort that says: “if you put your hand in the fire you’ll get burnt.” An unconditional forecast says “you’ll get burnt”. These are obviously two different things.
Personally, I think unconditional forecasts - the sort that say “GDP will grow 1.4% next year” - are pretty much worthless and simply bring economics into disrepute.
But this isn’t the issue here. Instead, Brexiteers’ beef is with the OBR’s conditional forecast – with its claim that:
Over the time horizon of our forecast any likely Brexit outcome would lead to lower trade flows, lower investment and lower net inward migration than we would otherwise have seen, and hence lower potential output.
Is this claim wrong? Attacks upon the OBR’s record at unconditional forecasts are just childish ad hominem arguments that are irrelevant – not least because the OBR’s view is shared by so many others.
Better arguments would be that Brexit would permit freer trade (as Gerard Lyons still believes) and that this, plus sterling’s fall, would boost GDP growth.
Personally, I doubt this. But what’s the evidence?
You could argue that today’s figures showing a better than expected rise in business investment in Q3 is consistent with Brexiteers’ optimism; it might show that industry is indeed tooling up in anticipation of higher demand.
But here comes my second fact. It’s not just pointy-headed experts and elites that are gloomy about the economy. So too are the people.
And this thinking is correct, to some extent. My chart shows that the ratio of consumer spending to house prices (a rough proxy for spending-wealth ratios) has predicted medium-term GDP growth in the past. Low spending in 1973, 1979, the late 80s and mid-00s all led to slower GDP growth, and high spending in the mid-90s led to decent growth. Since 1971 there’s been a correlation of 0.63 between the consumption-house price ratio and subsequent five-year growth in real GDP.
Which brings me to the punchline. This ratio is currently below its post-1971 average, which points to below-average GDP growth. Not catastrophic, note – merely below average. In fact, if post-1971 relationships hold, this ratio predicts GDP growth of 1.8% per year until 2021 – which, coincidentally, is exactly the same as the OBR forecasts.
Now, you can quibble with this, not least because there is of course a margin of error in this relationship. Brexiteers might argue, I suppose, that because consumer spending is partly shaped by habits it hasn’t yet fully responded to the good news of the Brexit vote. Such a hypothesis implies that spending should rise a lot in coming months. Let’s see.
For now, though, this leaves Brexiteers with a problem. It’s not just the experts they so despise that are downbeat about the economy. So too are those founts of all wisdom, the people.