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January 11, 2017

Speech by Douglas McWilliams at FSB report launch

Speech by Douglas McWilliams, Wednesday 11 January 2017

 

As David Smith’s analysis in the Sunday Times last Sunday showed, forecasters had a good year in 2016. Most of us got it roughly right. The Cebr forecast was GDP growth of 2.0% while the current estimate is growth of the year will turn out at 2.1%. Getting that close is partly good judgement but there must also have been a fair bit of luck….

 

Slightly surprisingly Andy Haldane, the Bank of England’s chief economist, has said the profession is in crisis over its forecasting failures. What he really means is that the Bank of England and the OBR got their forecasts wrong. That is not a profession in crisis but an unwillingness of the public sector to learn from those of us in the real world.

 

Why does the private sector get it right and the public sector not? There is a mix of reasons but one of them is that private sector pays relatively more attention to survey data and less to government statistics. And as the economy restructures towards small business, the FSB Small Business Index survey, the latest results of which are launched today, is an especially important survey.

 

What the survey shows is that growth in the small business sector is likely to be sluggish this year. It also shows that the mix of the creative sector and the IT sector which I have called the Flat White Economy (and which by the way doesn’t get picked up properly by government figures) will be the leading sector.

 

The world economy accelerated in the latter part of last year. The figures released last night show air freight now growing at twice the average speed of the past 5 years. The world is flush with money from monetary easing in the US, Europe, U.K. and of course China and Japan. This combined with an inventory cycle in china has boosted the price of oil, which has doubled from its low point last year, and the prices of most commodities. We released our world economic league table on Boxing Day with growth forecasts for 187 countries and what it shows is that globalisation is taking on a new lease of life and expanding into a wide range of new economies. Some of the fastest growth is predicted in various Pacific islands for example.

 

In the U.K., there is a lot of money in the system, which has prevented the pound from recovering after the kneejerk reaction to the Brexit vote. The weak pound and the aftermath of the Brexit vote will dominate the U.K. Economy this year.

 

At some point the weak pound will squeeze purchasing power and the consumer boom will come to an end. My impression is that might have started last Christmas. We will also see business investment declining, our forecast is by 4% in real terms. But we will also see strong export growth. Our guess is taken together these will lead to 1% growth and inflation rising to nearly 3% by the end of the year.

 

We might possibly see a rise in interest rates if sterling weakens further. But our central forecasts suggest not. Rising inflation and slower growth….the picture that we see is very much that painted by the latest FSB survey. So clearly it must be right…..

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