A member of the Bank of England’s influential Monetary Policy Committee (MPC) has admitted that economic forecasts are always likely to be wrong.
But Michael Saunders, an economist who joined the MPC in the wake of the vote to leave Europe, robustly defended the importance of such forecasts – even if they are “fallible” – as the UK economy faces increased uncertainty in the wake of Brexit.
Mr Saunders, who was in Aberdeen to speak to a meeting of members of the Institute of Directors (IoD), noted that while the UK was likely to experience “modest adverse” effects on growth over the long term as a result of Brexit, Scotland’s own economy was “stabilising” while the north-east was possibly seeing the beginning of better times as it emerges from the oil and gas downturn.
The Bank faced criticism by pro-Brexit politicians and supporters after it issued warnings of the possible consequences of the UK’s departure from Europe that have not come to pass.
Mr Saunders said: “Forecasts are always likely to be wrong. That is just the nature of forecasts.
“We try to present our forecasts as a probabilistic range.
“The fact that forecasts are always likely to be wrong in some way doesn’t mean it is a pointless exercise.
“In setting policy you are obliged to be thinking about the output further ahead.
“It is probably better to be doing that with a forecast of some kind, even if the forecast is fallible than with no forecast.”
He argued that the UK’s surprise performance on the upside was mainly due to that fact there wasn’t a credit freeze in response to the Brexit vote as had happened during the banking crisis on 2007/8 and the Euro panic of 2011/12.
“Part of the slowdown in growth which you had in those times was because of the credit shock rather than uncertainty itself,” he said.
“This time around you had a spike in uncertainty after Brexit vote but the cost and availability of credit didn’t worsen.”
Meanwhile, Scotland’s below-trend economic growth relative to the UK in recent quarters may be on the turn as the lower pound delivers a boost to tourism and the pressure on the oil and gas sector eases.
He said: “What I am hearing from businesses here is after a tough period, overall things seem to be stabilising. But not necessarily in every sector.
“Some sectors are doing better, notably tourism-related. That is something I hear across many parts of the UK.
“Some sectors to do with oil and gas, particularly capital spending, are still being squeezed.
“Overall I sense perhaps it is not as bad as it was.
“For the UK overall, last year was a modest growth year. But there is quite a range around that. Scotland has been one of the weaker regions in that period.
“But whereas in the rest of the UK things now seem to be struggling modestly, at least as this part of Scotland goes I’m not sure if it is slowing further, it may be a little bit better.”
But he added: “I want to stress some caution over that – I haven’t heard anyone say things are a lot better. From a period of things being weak perhaps it is a little better.”
He underlined the importance of the oil and gas sector to the UK economy as a whole, despite North Sea tax receipts plunging into the red for the first time in the sector’s history in 2015.
He said: “The contribution of the oil sector to the UK economy is much wider than purely the amount of oil tax revenue it contributes year on year.
“I’d say that’s far too narrow a measure to think of it in terms of.
“It is a major employer, it is a major amount of investment, major export industry and the oil sector invests more than the car industry.
“Its fiscal impact is much greater and substantial even if it is not paying any oil tax.”
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