When Bank of England chief economist Andy Haldane suggested that the bank may have had a Michael Fish moment over Brexit, he was being unfair to weather forecasters.
Mr Fish failed to predict the Great Storm in 1987. But he did not have a bias against thunder or lightning. As a weatherman he probably quite liked storms. He just failed to predict a tail event — and we’ve all been there.
The trap that the Bank of England is in danger of falling into is far more serious — that of systematic cognitive bias.
All of us have these types of biases and good economic forecasters are careful to be aware of their own prejudices. Not so the Bank of England. It has now come to embody anti-Brexit cognitive bias to such a degree that it endangers its credibility as an institution.
Mark Carney’s intervention during the Brexit campaign, when the Bank of England governor warned that Britain’s exit from the EU could spark a recession, is well known. The bank’s economic forecasts post-referendum have received less attention.
In August 2016, the bank produced updated forecasts. Exports in 2017 would be down 0.5 per cent, despite the strong boost they had received from the devaluation of sterling. Looking at the year-on-year figures for the third quarter, in practice they are up 8.3 per cent. Over the same period business investment in 2017 would be down 2 per cent. Yet, in the most recent Office for National Statistics figures, it is up 1.7 per cent. Housing investment would be down 4.75 per cent. Looking at the most recent data (end September), it is actually up 5 per cent year-on-year. Employment growth would be zero. In reality, it is up 1 per cent from already very high levels.
The bank’s forecasts were so far adrift as to be embarrassing. And because the Bank of England not only makes predictions but also sets monetary policy, poor forecasting can lead to poor policy. Those errant forecasts provided the rationale for last year’s emergency cut in interest rates and additional quantitative easing that were, with the benefit of hindsight, unnecessary.
The governor needs to be careful that the bank does not make more serious mistakes. If Mr Carney retains the biases exhibited to date, he is likely to regard departure from the EU in March 2019 as bad news for the UK economy and therefore retain a loose monetary policy bias. Yet, is it not equally likely that just as the uncertainty of the past 18 months has held back inward investment, a clearer outlook for Britain’s future will unlock pent-up investment demand? And maybe there will even be a boost to consumer confidence when our political leadership is finally able to articulate a vision for the country?
The BoE seems to have settled on a new pessimism about inflation remaining above target, based on the supply-side effects of Brexit. Yet this is allied to an assumption of weaker real income growth. How can lower labour force growth lead to higher inflation risks and lower real income growth? In forecasting terms, the bank seems to be doubling down on pessimism.
I do not underestimate the difficulty of forecasting and, being pro-Brexit, have to be wary of my own cognitive biases. The bank should be just as cautious. Unfortunately, in the Davos/Goldman Sachs/Jackson Hole echo chamber that some of the BoE’s monetary policymakers apparently inhabit, almost everyone has the same biases. Seen from inside this bubble, QE has nothing to do with wealth inequality and democracy can be an inconvenience.
Mr Carney’s term expires in 2019. This may be the moment to reset the bank’s cognitive balance. In the meantime, its leadership needs to get out more — otherwise Labour’s gimmicky proposal to move the bank to Birmingham might gain traction.
The writer is chairman of Marshall Wace and writes in a personal capacity