Duncan’s Economic Blog

GDP growth & the missed OBR forecasts

Posted in Uncategorized by duncanseconomicblog on July 26, 2011

The chart below shows the OBR forecasts for the last four quarters of growth as they were in June last year before Osborne’s emergency budget, in June last year post that budget, in November last year and (the most up to date) forecasts from March. It also shows the actual outturn.

As can be seen the economy is 1.3% smaller today than the OBR thought it would be before Osborne’s first budget and 1% smaller than it thought afterwards.

It’s 0.4% smaller than the OBR estimated it would as recently as March.

The OBR forecast for the year of 1.7% now looks to be about as accurate as its previous estimates.

(More from me on Labourlist)


13 Responses

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  1. Dave Holden said, on July 26, 2011 at 11:02 am

    So when does the OBR get disbanded?

  2. Pete B said, on July 26, 2011 at 11:52 am

    Can someone remind me why Osborne invented the OBR in the first place? Something to do with ‘accuracy’ and ‘responsibility’ and ‘independence’ …?

  3. Luis Enrique said, on July 26, 2011 at 1:12 pm

    Dave, Pete,

    to an extent it is to be expected that there will be periods of times when the economy repeatedly “surprises” in the same direction, becuase analysts take time to catch up with reality. If they tried to correct for this, and upon the first disappointment leapt to a much more pessimistic analysis, they’d probably just end up being wrong in a different way.

    but there probably is an inherent optimism bias in any quasi-official forecast – just because of the alarm that a large negative revision causes. Maybe even with some justification, if you think there are confidence feedback effecfs from official forecasts.

  4. Richard Blogger said, on July 26, 2011 at 1:32 pm

    One can understand that economic forecasting is not easy and liable to mistakes. (Any chance of a similar graph but with error bars?)

    However, it is interesting that the *independent* OBR’s forecasting is optimistic and puts the government in a better light. I don’t know many economists, so perhaps someone can educate me: are they natural optimists?

  5. Dave Holden said, on July 26, 2011 at 2:25 pm

    Hi Luis,

    It would be interesting to see this kind of graph for longer time periods and several agencies. Fundametally I wonder whether current economic predictions can every be accurate when it’s clear Economics is anything but a science and its models are highly suspect.

    To wit I found this another fascinating post from Distributed Economics http://www.cargocultist.com/?p=1586

  6. Jomiku said, on July 26, 2011 at 6:45 pm

    I noted this on Buttonwood’s blog so forgive me if you also read comments there.

    One thing that strikes me is the way the rationale for austerity has drifted away. The economic idea in the models was that austerity – meaning a program announced and implemented with some assurance so it generates a reasonably strong signal – would provide the missing confidence to suppliers, both manufacturers and service companies. They would then increase output, hire, etc. After all, as people on this blog point out, Britain exports but its economy is still mostly domestic demand.

    Where is the effect? The models, all Ricardian in origin, aren’t showing squat for a result. So confidence as a rationale is gone from discussion.

    • Cahal Moran said, on July 26, 2011 at 7:20 pm

      ‘The models, all Ricardian in origin’

      You are giving them too much credit. Here is Ricardo himself on Ricardian equivalence:

      ‘But the people who paid the taxes never so estimate them, and therefore do not manage their private affairs accordingly…It would be difficult to convince a man possessed of £20,000, or any other sum, that a perpetual payment of £50 per annum was equally burdensome with a single tax of £1000.’

      It was a theoretical curiosity for Ricardo, nothing more. Trying to apply it is simply voodoo economics.

      • jomiku said, on July 26, 2011 at 11:51 pm

        As I’m sure you know, Ricardian Equivalence is the invention of Robert Barro. The idea requires both immortality and a specific weighting of future value. That is, it assumes your money lives in your family forever and that you care as much about the resources of your descendants as you do about your own needs. These are useful assumptions in a model but they have nothing to do with real life. The first is simply untrue and the second is nearly irrational; it assumes you have to plan fully for your descendants, meaning you believe they are incapable of generating any funds necessary to pay expected future taxes. There is literally nothing in behavioral literature to indicate people act like this. It’s difficult even to treat this assumption without giggling – which shows how little the realities of the idea are discussed.

        But this Equivalence nonsense isn’t what I meant. As I’m sure you know, the first real formulations of markets were based on suppliers, even to the point of claiming that supply makes demand. It wasn’t until Keynes that people were able to express in rigorous terms the demand side issues. These supply models dominate conservative economics. Couple rational expectations with these supply models and you generate the silly ideas we’ve been seeing that all we need is confidence. In the US, this is expressed as the only reason companies aren’t hiring is uncertainty over what the government might do, meaning a lack of business confidence. It is quite similar to the attitudes of government going into the Great Depression, except now rooted in the idea that these expectations will operate on supply.

        Problem of course is these models have been wrong through this entire episode. They haven’t predicted anything correctly while demand models have. That won’t stop them; it’s much harder to admit you’re wrong than to keep hoping the facts will change.

        • Cahal Moran said, on July 27, 2011 at 7:47 pm

          Of course, Barro was its most staunch advocate. Why, I have no idea – as you point out, it is ridiculous.

          On Keynes, you are wrong, but in a good way. The classical economists actually believed there could be a general glut:


          There was clearly significant rewriting of history between 1829 and 1929, as Keynes was considered Say’s nemesis, when Say mostly likely would have agreed with him. Obviously Keynes had a more thorough analysis, but in general it’s pretty clear the Keynesian position was not at odds with the other classicals (though it is at odds with the wealthy, of course).

  7. Gareth said, on July 27, 2011 at 8:32 am

    I am struggling to reconcile this graph with the data, Duncan.

    The June 2010 budget forecast real GDP growth of 1.8% for the 2010-11 fiscal year.

    The outturn was 1.9% real GDP growth, so the graph should show a beat, regardless of what happened in 2011 Q2 (which is part of the 2011-12 fiscal year).

    • duncanseconomicblog said, on July 27, 2011 at 8:36 am

      I’ve emailed you the data.

  8. Gareth said, on August 11, 2011 at 12:06 am

    Thanks for sending me the data! I was thinking of the calendar year figures, on which 2010 yoy growth was a beat vs the PBR estimate. I have worked out how to navigate the OBR site myself now…

    The maths (or phrasing) you use here is sloppy; you say “the economy is X% smaller than expected” when you mean “growth over the period is X% smaller”. If you start from 100 and expect 100% growth, but get 50% growth, your economy ends up at 150 not 200, which is 25% smaller than expected.

    If I take 2008Q4 as fixed and project from the volume GDP growth figures from there using the full series from the PBR report, and compare with the current turnout, I get volume GDP coming out roughly 0.6% smaller than expected by 11Q1, and 0.9% smaller than expected by 11Q2. Krugman is fond of calling people out for being selective in the choice of comparison period, so fair’s fair 😉

    I would note also that the real/volume GDP figures are getting revised down because the deflator is getting revised up; nominal GDP for FY11-12 has actually been revised up a tad since the PBR. It seems much harder to make a case that cuts to fiscal spending are hurting demand on that basis.

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