How wrong they were

Rob Jupp

July 14, 2016

EU Brexit European Union

Rob Jupp is chief executive of Brightstar Financial

If we have learnt anything over the past couple of weeks it is once again to highlight just how wrong political forecasters can be.

The polls were completely wrong following the general election and we learned to take their predictions with a healthy dose of scepticism.  This time the polls were closer but political forecasters and economists appeared to get the results so completely wrong.

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The scary element, as highlighted in the past few days and weeks, is that the people who keep failing to predict a correct result are the same people whose opinions are influencing our stock markets and consumer confidence.

The forecasts of these “experts” drove up markets as well as sterling exchange rates ahead of the referendum.  It seems that every “expert” moved in full expectation that the UK public would vote to remain in the European Union.  This only made the resultant fall so much greater when their predictions turned out to be wrong, increasing the level of damage done as UK stock markets tumbled.

I heard once that an economist is considered to have done a good job if just over 50% of his or her predictions come true.  This is an incredible situation where in most other jobs, if you only did half of your job right you could rightly expect to be sacked.

Despite the thousands of people paid significant sums to study the markets, and the financial markets in particular, only a handful of people worldwide predicted the financial crash. Even Mervyn King, the former governor of the Bank of England is renowned for many inaccurate forecasts including saying in May 2007 that financial stability risks “appeared to be low” just before the collapse of Northern Rock, Lehman Brothers and the start of the financial crisis.

Some of Mervyn King’s other mis-predictions were summed up nicely in a recent FT article by its economics editor Chris Giles. Chris reported that Mervyn King ‘predicted in 2008 that “Now is the time to take the liquidity issue off the table in a decisive way” only a few months before British banks failed, partly as a result of a lack of liquidity’.

He goes on to say, most ironically, in February 2010 that Mervyn King prophesied ‘the Eurozone crisis would force “greater political cohesion” in continental Europe and this would compel Britain “to demonstrate that it has something meaningful to say and to be constructively engaged in the EU”’.

All of which seems to prove the theory of economist John Kenneth Galbraith that “The only function of economic forecasting is to make astrology look respectable”.

If even the governor of the Bank of England cannot get it right, it leaves little hope that others will.  While our mortgage industry also has its fair share of pundits and forecasters, the shocking record of all analysts re-emphasises that predictions play no more valuable role than filling up column inches.

Where it takes on a more sinister role is when people act on these forecasts: when the stock markets and currency markets do move as a result of them and, just as dangerous, when the headlines associated with these predictions damage consumer confidence. After all, 75% of the UK economy is consumer led.

As the majority of predictions are no better than best guesses, but their results can be so devastating, it’s surely time for a new approach and a lot more evidence-based reporting.