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Re-writing history on business investment forecasts

Ben Chu

There seem to be a multiplying number of people who are making the point that an upturn in business investment was always going to lag behind a return to consumer spending in our economy.

The Bank of England Governor, Mark Carney, became the latest to hum this particular tune in his New York speech earlier this week:

“Although the current account position underscores the need for the recovery to shift over time towards investment and export growth, it would be unreasonable to expect that to have happened already. Recoveries are seldom led by investment and strong demand from the UK’s major trading partners, including the euro zone, appears some way off.”

There’s a whiff of history being re-written here.

The Treasury’s Office for Budget Responsibility certainly expected business investment to snap back quickly in its June 2010 forecast at the time of George Osborne’s “emergency” Budget. It expected growth of 8.1% (2011), 10.0% (2011). In fact the out-turn has been -1.3 (2011) and 2.6% (2012).

And as this chart, from the OBR’s latest forecast evaluation report shows, the weakness of business investment has been responsible for the majority of the shortfall in growth relative to its 2010 projection:

biz11 Re writing history on business investment forecasts

There’s a separate debate about whether this shortfall in business investment was influenced by George Osborne’s austerity drive. But for our purposes it’s enough to note that the OBR expected considerably more spending by firms than has materialised.

But what about the Bank of England?

Well their overall forecast was just as incorrect as the OBR’s in 2010 as this from November’s Inflation Report shows:

biz2 Re writing history on business investment forecasts

Now historically the Bank has been much more secretive than the OBR over its calculations, offering little more detail than headline growth and inflation forecasts.

But there was a rare chink of light let in on that Threadneedle Street magic in the most recent Inflation Report too. This chart broke down how the Bank got its forecast wrong in 2010:

biz3 Re writing history on business investment forecasts

What we see here is that the Bank too also expected business investment to contribute to growth after 2010. Had it been otherwise there would be no orange bars (business investment) below the horizontal axis.

So if the Governor really thinks it was so “unreasonable”  to expect business investment to play a part in driving the recovery, he should have a word with his own forecasting team.

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