Who needs experts?
Economists have found themselves out of favour with populist politicians over the last year, classed as out of touch with reality and having their forecasts constantly criticised. However, 2017 promises to be a year of disruption and with the world in the midst of an economic transformation, the need for high quality economic advice is greater than ever. So how should economists respond?
As they are usually wrong anyway.
Much of the criticism of economists has centred on the supposed inaccuracy of their forecasts. In the UK, both the short-term and longer-term forecasts of the economy have been cited as examples of the failure of economists to predict accurately.
However, these assertions are both premature and simplistic. In the case of the short-term forecasts, economists were basing their predictions on the statement by the then Prime Minister, David Cameron, that the UK would invoke Article 50 and begin the process of leaving the EU on June 24th, the day after the referendum on EU membership. The actual process has been different and the UK may now not make the move on Article 50 until March 2017. Such a shift in policy obviously impacts the economic outlook and the only conclusion we can draw is that economists forecast the politics wrongly, it tells us little about the quality of economic forecasts.
Similarly, it is far too early to judge the long-term forecasts of how leaving the EU may impact the UK. To date the UK economy has proved reasonably resilient although growth is lower than we would expect given the recent strong performance of the UK economy and the value of sterling has fallen significantly. However, there is nothing in the performance of the economy since June 23rd that provides any clues to the impact of Brexit on the UK in 2025 or 2030 – the dates that the long-term forecasts were based on. It is worth noting nevertheless that these forecasts were based on assumptions around future trade, regulatory and migration policy and, so far, these seem to reflect the potential outcomes, if we listen to the current positioning statements of both sides ahead of actual negotiations. It will be some time before we can judge what the outcomes are likely to be.
But the world is complicated…
The preceding discussion does provide some pointers as to how economists can help businesses and policy makers going forward. Over the last year or so, we have seen many widely held assumptions and positions come under challenge. The UK voting to leave the EU is one and the strong support across the world for globalisation is another. These changes have consequences for the future economic outlook.
At the same time, disruptive forces continue to develop. Technology and the potential for digital disruption in particular receive most attention but demographic change, increasing inequality and concerns over global warming could all have significant consequences.
…and outcomes are uncertain…
The world is in the midst of an economic transformation and economists can help businesses and policy-makers identify the implications of change. We should focus less on the percentage point accuracy of forecasts and more on identifying the drivers of change and the ways in which these might impact the economy. Decision-makers should be asking themselves:
“What do I need to believe to make this decision?”
As an example, the UK exchange rate has fallen around 15% against the dollar over the course of 2016. Yet, 67% of UK executives surveyed in EY’s 15th Capital Confidence Barometer see this as a relatively temporary effect and are not adjusting their plans significantly. If however, they believed this change would be a permanent one, the logical conclusion would be to allocate more capital to export activity. The economic data currently would suggest that the pound is unlikely to strengthen significantly versus the dollar and so understanding this could provide businesses with a competitive advantage.
…so expect the demand for economists to increase.
Despite the criticism of economists, a changing and complex world means that access to high quality, balanced and strategic advice is more important than ever. Certainly the number of requests for discussions on the outlook is higher than ever in my experience. Look out for your friendly economist in 2017, everyone should have one.