Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
When asked what they think about the economy, the British public can sometimes be horribly blunt. In a YouGov survey after November’s Budget, three in four people thought the government was managing the economy badly. Chancellor Rachel Reeves’ statement landed badly with four in five business leaders surveyed by the Institute of Directors. And Ipsos Mori reported that the proportion of people who thought that she was doing a good job was lower than that of those who still approved of Kwasi Kwarteng after the disastrous “mini” Budget of September 2022. These views will be compounded by Friday’s economic data showing the UK economy contracted for the second consecutive month in October.
I have no doubt that these feelings are honestly expressed. But is it really true that the UK economy is unhealthy, as 79 per cent of the public think? Or that it will be in a worse state in a year’s time, as nearly two-thirds believe? Might this pessimism in fact become a self-fulfilling prophecy — leading to the nation no longer being able to rely on the British consumer’s desire to shop?
Normally, I would dismiss such theories, but some compelling new Bank of England data has made me change my mind. In a revealing new spreadsheet, officials have compiled a series of all their previous forecasts since 2007, making it easy to gauge their accuracy.
If we go back roughly three years to November 2022, media headlines resulting from BoE forecasts screamed that the central bank was predicting the UK’s longest ever recession, even if the Financial Times had a more sober take (the BoE was signalling that interest rates would not rise as far or fast as markets expected).
Since the BoE forecast horizon is three years, we can now examine how accurate the prediction of a prolonged slump was: the real size of the UK economy is 7.4 per cent larger than forecast. If we are gloomy now, just imagine how bad we would feel if families with two children had annual incomes just over £13,000 lower on average. That is what the bank was expecting.
I am not asking you to be grateful for the small mercy that the economy did not suffer its longest recession ever. But it is instructive to examine why things have turned out better than predicted and whether that should have any relevance for our mood today. The UK is close to record-high employment, for example, but the prevailing public impression is that unemployment and welfare claims are as bad as the 1980s and there is no growth at all.
The first reason that the forecasts proved spectacularly wrong was that in November 2022, the BoE thought the size of the UK economy would fall by 1.8 per cent over the following three years. It has, in fact, grown 2.8 per cent. The underlying difference has nothing to do with poor modelling, but simply that wholesale gas prices did not remain exorbitant. Instead, they fell sharply, raising UK growth and living standards.
The second reason for GDP being 7.4 per cent higher than expected is that the Office for National Statistics has revised up the real level of UK economic output both for 2022 as well as for the years since. Sadly, this is far from a one-off for our national statistical agency.
Since 2007, the first version of official economic history — the version that gets reported as news every few months — showed that the average annual growth rate was 0.76 per cent. By contrast, the current version of the same history says average annual growth was 1.34 per cent, 76 per cent better.
The main periods of measurement error came in the austerity years of 2012 to 2014, in 2017 during the early period after the Brexit referendum and in recent post-pandemic years. The truth is that a huge pessimistic bias in our national accounts has led us to be fed with contemporary reports of doom and gloom, which subsequently turn out to be nonsense.
But it is the first version of economic events that enters the national debate — and the national consciousness — for the entirely understandable reason that initial releases of economic data make news. You cannot expect people to care deeply about a revision to data that is three years old. Psychologically, they have made up their mind by then.
We are still told that 2010s austerity destroyed growth, but the data no longer supports that story: growth between David Cameron’s election victories of 2010 and 2015 now registers an annualised average of 2 per cent. The contemporary story was that we were entering a “triple-dip recession”.
It does not stop there. We thought that the UK missed out on the 2017 US boom, but that also turns out not to be true. And after Covid-19, instead of a recessionary economy, the growth overseen by chancellors Jeremy Hunt and Reeves has been pretty average rather than something to bemoan.
These revisions to GDP also mean that three times during this decade so far, we have fallen into a panic about national debt because the ONS reported that public sector net debt exceeded the size of the economy. Each time, in late 2020, in May 2023 and in September 2024, those figures turned out to be wrong. The latest ONS estimate is that public debt is 94.5 per cent of GDP.
As economists, if we wonder why people are saving rather than spending, we have tended to point to high interest rates or scars from the recent inflation episode. We should also consider the narrative we tell ourselves. A desire to save no longer seems so surprising when the government, opposition parties, official statistics and the media all report that the British economy is in terrible shape.
Let’s be clear. Our economy is not booming. But it is much healthier than feared. So, if you are asked how well the UK economy is doing, remember that it is considerably stronger than the mood music would lead you to believe.
chris.giles@ft.com
#economy #bad #youve #told