May 24, 2023 - 11:30am

Economic forecasting isn’t an easy gig these days. While economic analysis might seem a purely empirical task that reveals objective information, the truth is that every forecast will inevitably influence the outcome of the next. Economic actors will take estimates of the macroeconomic picture into account and adapt their future behaviour. In other words, every forecast runs the risk of becoming a self-fulfilling prophecy and, depending on its nature, the forecasters want to either avoid or encourage this self-fulfilment.

In the case of Germany, for example, there have been several revisions since December 2022, given that every original forecast turned out to be overly optimistic and in need of a downward adjustment. One should keep this in mind before celebrating yesterday’s news that, according to the IMF, the UK economy could grow 0.4% in 2023, instead of contracting 0.3% as was originally assumed. The fact that Bloomberg covered the story as “Britain’s Economic Guessing Game” is no coincidence, and just because it is good news for a change does not mean this forecast is more reliable than the ones which preceded it. 

First of all, 0.4% growth is anaemic at best, so the often ecstatic reaction to such meagre numbers reveals how low expectations for the economy truly are. What’s more, the finding that growth is stronger than in Germany — which has turned itself once again into the sick man of Europe — is ultimately meaningless. 

German underperformance is no indicator of British excellence, especially considering that Germany is the UK’s second most important trading partner. Economic downturns are contagious, and the idea that the UK will prosper while Europe’s largest economy drags the rest of the pack into recession is highly unlikely, regardless of what the revised IMF forecast says. 

Things look equally bleak on the other side of the Atlantic, and a majority of US economists believe that the United States will enter a recession in the second half of this year — although it remains to be seen how deep and prolonged the downturn will be. But with both the US and Germany facing an economic contraction, one should be sceptical about the UK being the exception which escapes a general negative trend. This is also reflected in polls measuring views in the business world, which remains quite cautious about the larger macroeconomic picture and where confidence is only returning very slowly.

One key element of the more positive IMF prediction is an anticipated prolonged decline in energy prices. This assumption coincides with a warning yesterday by Qatar’s energy minister that the “worst is yet to come” for Europe in the energy sector, and that it was only due to an unusually warm winter that a catastrophe had been delayed. The IMF report also barely touches on the ongoing war in Ukraine, another geopolitical factor that makes all economic forecasts inherently unreliable as things stand.

A cautious observer would assume that the IMF wanted to increase economic confidence through a more upbeat outlook, which is understandable. Yet if experience is any guide, the next revision won’t be far away.