Danny Blanchflower, a former member of the Bank of England, writes a critical piece on the Bank of England’s forecasting record in the Independent.
“The second chart gives cause for concern because for the umpteenth time the MPC is forecasting rapid recovery, which is extremely unlikely to happen, and it seems that little has been learnt. The same team remains in charge, so it’s hardly surprising the MPC makes the same forecasting errors over and over again. Growth is going to take off apparently and will be around 3 per cent per annum or even above that in two years. Indeed there is some prospect, according to the MPC, that in 2013 growth will be as much as 5 per cent and even 6 per cent in 2015 with little or no chance of zero or negative growth. Nobody believes that nonsense. LOL.”
To be fair to the Bank of England, few other economists were forecasting a recession in 2008. The Bank of England cut interest rates quicker than the ECB in 2008 / 2009.
Also, in 2011, although the Bank was overly optimistic about economic growth, the Bank made a correct call on inflation. Despite CPI inflation rising to 5%, they saw it as only temporary inflation and left interest rates unchanged. – Arguing core inflation was low and expecting a fall in inflation during 2012.
One forecast that looks to be correct, but will the optimistic growth forecasts come true?
This compares to the response of ECB who raised rates in 2011. A move that has been widely criticised given the fall in European growth prospects and temporary nature of the 2011 inflation.
However, as Danny Blanchflower comments:
According to the most recent data, less than half of the lost output has been restored, making it comparable in-depth but longer lasting than the Great Depression. The public is entitled to ask why nobody at the Bank has taken responsibility for failing to spot the biggest financial crisis in the last century – they missed the big one, arguably comparable to the CIA’s failure to predict the fall of the Berlin wall.
Interestingly, the Bank of England have said they can’t include the risk of a Eurozone breakup in their economic growth forecasts – an admission that growth forecasts don’t include all possibilities (and the risk of Eurozone recession seems very high indeed).