Sky in ‘not falling’ shock

Here is a table showing projected growth in real GDP per capita [*] for 2007-08, according to IMF data released this month:

2007-08 2008-09 2009-10
Canada 0.0% 0.6% 2.0%
France 0.8% 0.7% 2.0%
Germany 1.5% 1.1% 1.9%
Italy -0.1% -0.1% 0.4%
Japan 1.4% 1.6% 1.8%
United Kingdom 1.3% 1.4% 2.1%
United States -0.5% -0.4% 1.9%

In other words, credible independent people who understand economic forecasting (note: not people who couldn’t tell GDP from a CDR but who think the PM is dour and boring and that therefore everything is going to the dogs) believe that the UK economy is unlikely to see recession, and is highly likely to outperform all of the G7 economies except for Japan over the next three years. Most other economic forecasters hold similar views, with a strong consensus that 2008 real UK economic growth will be 1-1.5%.

So why the hell is there such an insanely overhyped climate of doom going on, with people who shouldn’t really know better everywhere pontificating about how the government has ruined everything and left us all in a terrible position? Is it just that everyone who bothers going on about this kind of thing is a miserable get, whereas the people who think everything will probably be fine would sooner talk about Eurovision and football?

It’s partly due to misleading reporting, of course. Hands up who read this morning’s paper and came away with the take-out that UK retail sales fell when comparing March 2008 to March 2007? Wrong: they rose by 1.1%. The fall was in ‘like-for-like’ sales – i.e. new shops are opening faster than people are increasing their spending. That’s not great news if you’re a retailer, for sure – but it also for sure doesn’t mean that sales are falling…

[*] i.e. stripping out the effects of inflation, so you can’t whine about price rises, and done consistently on an international basis, so you can’t whine about CPI vs RPI. Oh, and please don’t slate the methodology the IMF uses to calculate GDP deflators, at least unless you have at least a master’s degree in a numerate discipline with some connection to economics.

13 thoughts on “Sky in ‘not falling’ shock”

  1. Everybody loves doom-laden stories, half of us seem to think that capitalism is a house of cards about to come crashing down at any given moment anyway (okay, maybe that's the straw Guardian reader in my head) – so throw in a couple of poorly understood but actually existing problems (credit crisis, rising food prices) and we have everything required for a delicious orgy of despair.

    I wonder how real the self-fulfilling prophecy effect is, what magnitude it is, if it exists, what sort of process controls its shape (it must have feedback/multiplier effects, but something has to counter act it. Output isn't going to collapse to zero) etc.

    I know those forecast are probably as good as they come, but I wonder if the model take account of crazy sentiment driven feedback loops, so to speak. What are they based on – fancy multi-variable time series forecasts of some sort? Would such models pick up out of the ordinary effects from an out of the ordinary situation like we're in? I think we are in an out of the ordinary situation – if nothing else in terms of sentiment and monetary policy. It wouldn't exactly be a earth-shattering surprise if those forecasts get revised/ turn out to be too optimistic.

    Hmm, I seem to have talked myself into the sky's going to fall camp – that's not what I intended. I agree – there's every reason to expect a mild slowdown, much needed drop in house prices, well deserved capital losses to some investors … and life carrying on much as before.

  2. So why the hell is there such an insanely overhyped climate of doom going on

    We've just had the power company bare its teeth at us. Not for a late or defaulted payment but along the lines of 'how dare you use this much energy to heat your house in the coldest quarter of the year'.

    When they try to double your direct debit overnight and you're on a tight budget, you can bet your arse you start to wonder if there's a climate of doom going on.

  3. I'll not wade into this one. When I hear a phrase like "credible independent people who understand economic forecasting" it tends to remind me of an ex-economist friend of mine who pointed out that all economic forecasts are based upon an analysis of the recent past and are therefore unable to incorporate novelty. As such, they're only useful in those cases when the future is very much like the past. If you believe — as do I — that something new is underway (specifically fossil fuel depletion), or about to happen, then the forecasts of economists are fundamentally unsound.

  4. Justin – isn't that just a case of "utility company shafts customers, film at 11?". Sucks to happen, but doesn't seem to have any correlation with turmoil in the economy…

    David – sorry, but people who couldn't tell GDP from a CDR but believe the country is going to the dogs were expressly barred from commenting.

  5. Jim – agreed that that would go beyond the models' capabilities, however sceptical that it's the problem now (rather than in 20 years, at which point it bites like a savage dog, and we're all screwed unless we've cut consumption, invested massively in non-fossil energy, and been lucky enough not to drown…)

  6. Hello. I came here via a link on Liberal Conspiracy. Perhaps things aren't looking *too* bad for the UK, but the scope of most people's concern does not end at our country's own borders…

  7. Masters degree – check
    Numerate subject – check
    Connected to economics – tangentially*

    Given that, what's the explanation for why the US is suddenly expected to do better than everyone else after doing worse than everyone else for two years? When I see outliers I tend to get intrigued.

  8. It's OK, none of the above are required to ask that kind of question.

    In previous US recessions, "utterly buggered before everyone else" has historically tended to be followed by "rapid recovery before everyone else". Weaker state? Weaker unions? More dynamic entrepreneurs? Sneeze-catch-cold effect? You decide…

  9. Hey thanks for the great blog, I love this stuff. I don’t usually do much for Earth Day but with everyone going green these days, I thought I’d try to do my part.

    I am trying to find easy, simple things I can do to help stop global warming (I don’t plan on buying a hybrid). Has anyone seen that EarthLab.com is promoting their Earth Day (month) challenge, with the goal to get 1 million people to take their carbon footprint test in April?… I took the test, it was easy and only took me about 2 minutes and I am planning on lowering my score with some of their tips.

    I am looking for more easy fun stuff to do. If you know of any other sites worth my time let me know.

  10. I'm afraid I only have a BSc in a numerate discipline, but I will note that prediction is still a very chancy business. The chancellor's crystal ball reading still seems to be about 0.5 to 1% above anyone else's.

    I'd be a little more confident if you supplied a list of prediction to historical data. Even then, I'd like to remind you that almost every stock trading prediction program became unstuck a few years ago, because whilst the formulae work most of the time, they don't cater for "irrational" behaviour.

  11. "I’d like to remind you that almost every stock trading prediction program became unstuck a few years ago, because whilst the formulae work most of the time, they don’t cater for “irrational” behaviour. "

    As Hamish in the Indie today says, although the City markets are an important part of the economy, they're not the entirety of it. The number of people in work continues to rise despite some well-publicised City redundancies.
    And stock trading predictions really don't have much in common with GDP predictions; stock values can change in an instant, but changes to GDP take place over almost geological timescales. Throughput through places like bakeries, abattoirs, docks etc will remain within a very small percentage of its average value. Stuff will continue to be produced and bought.

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