Forecasts: apart from saying the same thing, they’re always wrong
The economic consensus around Ireland’s recovery is now pervasive
A pick-up in consumer spending has been forecast consistently for more than a year but has yet to appear.
Some time ago, economist and columnist John Kay examined the record of 34 British forecasters over a seven-year period. His analysis revealed two things: the forecasters all tended to say the same thing and, without exception, there were all wrong.
Just as boom years yielded a toxic level of conformity, the consensus around Ireland’s recovery is now pervasive.
The Department of Finance, the Central Bank, the ESRI, the Fiscal Advisory Council, the European Commission are all forecasting growth of about 2 per cent for the Irish economy this year and of about 3 per cent next year.
In its latest economic outlook, employers’ group Ibec takes an even more bullish line, predicting growth of nearly 4 per cent next year, which would make Ireland the fastest-growing economy in the euro zone.
The economy, it said, was in recovery mode with more confident consumers spending again, investment recovering strongly and exports boosted by a better-than-expected recovery in the UK.
However, it based its growth forecast on the Government making a budgetary adjustment of €200 million – a consolidation which it says will deliver 10,000 extra jobs.
The Government has signalled that it plans to make an adjustment of something less than the previously promised €2 billion. However, €200 million looks like a long shot.
All of which begs the question, why is Ibec basing its forecasts on what it would like to see happen rather than what it believes will happen?
One might predict economic growth of 10 per cent next year on the basis of Europe agreeing to retroactive bank aid for Ireland and a major oil find off the Cork coast.
But how likely are these?
Another thing to consider is that last year even the most pessimistic forecasters predicted higher growth than we actually got, even with the recent revision.
This is not to say that much of the positive sentiment around Ireland’s recovery is wrong – improving conditions in the labour market speak for themselves.
However, a pick-up in consumer spending has been forecast consistently for more than a year but has yet to appear, and consumers could be facing higher oil and gas prices if the situation in the Ukraine worsens.
The nub of the issue is that economic forecasts need to come with stronger health warnings.