After the Brexit vote, the Financial Times summed up the general mood in the City by running a weekly doomometer, which was expected to chart the impending economic collapse in real time. But after a brief wobble, the economy got back to normal fairly quickly. Soon, the weekly data started to rather contradict the mood of panic – which baffled the various experts, many of whom had by then forecast an immediate recession. Pieces of good economic news were dismissed as deceptive snapshots. And when Q2 GDP came in looking very strong – 0.6 per cent (it was revised up to 0.7 per cent today) – that was dismissed as containing just a few weeks of post-referendum data. The real story, it was said, will come when the Q3 data arrives for July, August and September.
Well, that data was published this morning, and it is (again) stronger than expected, up by 0.5pc quarter-on-quarter – far better than the consensus estimate of 0.3pc. And yes, the total 0.5pc is a tad slower than 0.7pc of Q2 – but that was lifted by a freak surge in industrial production during April.
This 0.5pc growth for Q3 of 2016 is exactly in line with pre-referendum OBR forecasts. And it compares with the Treasury’s hysterical forecast of a contraction between -0.1pc and -1pc (Table 2C, pdf). The reality, it turns out, was far better. While economists were in mourning, the shopping public kept calm and carried on. Britain is this year forecast to have the strongest growth of any major economy. Not a bad tribute to George Osborne’s custody of that economy.
The question, now, is: why did so many intelligent economic analysts and commentators get it so wrong? How did some of the finest minds in Britain get themselves worked up into such a state that they predicted an immediate recession? How did the infamous Treasury dossier get out of Whitehall? When it published forecasts of an immediate GDP contraction of up to -1.0pc for Q3 alone, why wasn’t this immediately rubbished by people who should know better? Why was it treated so credulously? How could there have been an immediate collapse, given that Brexit would not have taken place? Negotiations to leave the EU haven’t started yet; there are no changes in our terms of trade. So why did anyone think the economy would have fallen off a cliff?
That isn’t to say there won’t be turbulence from Brexit – we’ll probably have slower growth in the short term, at least. The weak pound should put inflation back to normal levels (about 2.5pc next year), which should dampen consumer spending next year. But there will still be growth; no one is expected to be poorer by a penny. Let alone the £4,300pa that the Treasury absurdly suggested.
After the 2015 general election, the opinion pollsters had a long look at themselves to work out how whether groupthink had led them into error. There’s a case for the Treasury, and other economists, to work out what happened here. The behaviour during the Brexit campaign does undermine trust in government. Economic forecasts are supposed to be dispassionate. Today’s publication of the Q3 data might be a good time to ask what went wrong.