The Bank of England‘s (BoE) Chief Economist bemoaned the inherent risks of placing too much faith in economic forecasting given the failure to foresee the financial crash in 2008 as well as the Brexit vote.
Andrew Haldane conceded the economics profession was in “some degree of crisis”, when speaking at the Institute for Government on Thursday.
However, he reiterated the central banks view that the U.K. economy would suffer in 2017 as a consequence of the country’s vote to leave the European Union (EU).
“It’s a fair cop to say the (economic) profession is to some degree in crisis,” Haldane said.
“I’m not someone who would say that all that’s been done in the past is terrible. It’s just that the models we had were rather narrow and fragile. The problem came when the world was tipped upside down and those models were ill-equipped to making sense of behaviors that were deeply irrational,” he added.
The BoE’s chief economist noted the apparent “disconnect” between the historically high levels of political uncertainty and the “remarkably placid” response evident in the financial markets at present.
Before the referendum took place in June 2016, BoE Governor Mark Carney warned that the likelihood of a “technical recession” would be superior if the majority of citizens voted to leave the EU. Instead, the U.K.’s economy outperformed all other advanced economies in 2016.
More recently, Britain’s benchmark stock index, the FTSE 100, extended its record breaking streak on Thursday as the index closed higher for the sixth consecutive day for the first time in two decades.
Moreover, the U.K.’s services sector grew at its fastest pace in almost 18 months in December. The Markit/CIPS services purchasing manager’s index (PMI) hit 56.2, its highest level since July 2015.
Haldane described the lack of foresight among the economic community to prepare for both the financial meltdown in 2008 and the Brexit vote as a “Michael Fish moment”. This was in reference to the U.K. weather forecaster’s famous blunder in which, during a live broadcast, he dismissed the possibility of a hurricane hitting the south of England in 1987. Hours later the hurricane struck the south coast of England and caused widespread destruction and casualties.
“I think, near-term, the data, the evidence we’ve been accumulating since the referendum, has surprised to the upside. [There’s been] greater resilience, in particular among consumers and among the housing market, than we had expected. Has that led us to fundamentally change our view on the fortunes of the economy looking forward over the next several years? Not really,” Haldane concluded.
Haldane is not the first to lament the crisis within economics, billionaire financier George Soros called for new thinking as “the entire edifice of global financial markets has been erected on the false premise that markets can be left to their own devices.” In 2009, Soros pledged $50 million to fund the Institute for New Economic Thinking, which has a star-studded economic advisory board that includes, Joseph Stiglitz, Kenneth Rogoff and Jeffrey Sachs.
Britain’s central bank has maintained its view that the economic performance of the U.K. is likely to deteriorate once formal negations for the U.K. to divorce from the EU begin. Theresa May, U.K. prime minister, has pledged to trigger article 50 in March 2017.