Last week, Andy Haldane, the Bank of England’s chief economist said that the failure to predict the global financial crisis was a “Michael Fish” moment for economists. (You may remember that the BBC Weatherman had dismissively rejected suggestions of a hurricane just before the most violent storms of the decade caused many £00m damage across the UK in 1987.)
Prior to the financial crisis in 2007/8, most establishment economists had simply failed to recognise the massive corruption of the sub-prime mortgage industry in the USA and the destruction its inevitable collapse would produce on global financial stability.
Mr Haldane was then questioned about whether, prior to last year’s referendum, the Bank had suggested a much sharper slowdown in the economy than has actually happened – another example of poor forecasting. Since the referendum, GDP growth was at a better-than-expected 0.6% between July and September. Mr Haldane suggested that this was because of consumer confidence and the housing market. He said it was “almost as though the referendum had not taken place” and that people's spending power had not been “materially dented” in 2016.
Mr Haldane then said that there were “reasonable grounds” for thinking 2017 might be a “somewhat more difficult year” for the consumer as the fall in the exchange rate began to affect prices. But he said there was “nothing inevitable” about that – it was just a “best guess”.
I have a nasty feeling that Mr Haldane is actually being far too optimistic in response to Brexiteer sneers and triumphalism.
Let’s just consider some facts (not speculation or forecasting) which ought to really concern us:
- the value of the pound has fallen about 17% since June 2016. In the short-term this has boosted exports, but will inevitably increase price inflation soon.
- unsecured consumer credit – which includes credit cards, car loans and second mortgages – grew by 11% last year to nearly £200bn. The last time it was growing at this rate and to this record level was immediately before the crash 2007/8.
- nearly a million households – one-in-eight of all home-owners in England – are seriously struggling to meet their monthly mortgage payments of more than 35% of their total household income. 97% of those households are of working age and half have children. They have an average income of £25,000 per annum.
- 4 in 10 adults in the UK have less than £500 (about the average weekly wage before deductions) savings
And then factor in that the government has forced through cuts, in the transfer to Universal Credit, which will see 2.5 million working families hit with an average loss of almost £2,100 a year.
It is very clear that many households are just keeping their heads above water and that even a small downturn could produce a serious deleterious outcome for many people as well as the UK economy.
