Transcript The Global Recession: Returning to Normal?

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Assessing “Britain in 2010” (1991):
The Economic Projections and Outcomes
PSI Conference on “Back to ‘the future’: Assessing Britain in 2010”
Date and time: Wednesday 12 May 2010 from 2pm - 5pm
Venue: RSA, 8 John Adam Street, London, WC2N 6EZ
Terry Barker
Cambridge Econometrics & University of Cambridge
12 May 2010
Background to the projections
• PSI approached Cambridge Econometrics (CE)
to provide long-term projections for the UK
economy
• CE had developed through the 1980s an
industrial forecasting service supplying annual
projections up to 10 years ahead twice a year
for
– GDP, and other macroeconomic variables
– output and employment by some 40 industries
• The projections were based on the Multisectoral
Dynamic Model (MDM) originally built at the
University of Cambridge
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How the projections were made
• The model (MDM) was estimated on time-series
data and input-output tables, so that it
simulated the annual change in the economy at
a sectoral level, with totals being formed from
the detail
• With a set of assumptions about world growth,
population, oil supplies and economic policy,
the model could solve into the future
• The model is open in the sense that it allows the
balance of payments to remain in deficit and
unemployment to persist
– The deficit fell in the projections due to faster rate of growth of
EU single market
– And unemployment gradually reduced to below 1m by
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Changes in expenditure components of
GDP: projections and observed 1990-2010
based on
1970-90 1990-2010
(%)
projection
1985 prices
(%) 1985 prices
1990-2010
observed (%)
1985 prices
2005 prices
Consumers’
expenditure
76
46
95 (60 ex IT) 55
Government
expenditure
39
46
43
55
Fixed
investment
50
64
58
41
Exports
123
121
117
116
Imports
144
96
149
129
57
56
67
GDP
47
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Assessment of the GDP projections
• Price basis makes a substantial differences
• Observed 2010 GDP and components well below trend
because of 2009 “Great recession”
• Consumers’ expenditure and imports affected by IT
• Fixed investment especially low in 2010 – collapse in
housebuilding and commercial building
• Exports and imports grow much faster than GDP as
expected, but imports are well above projection
– Slow growth in prices as China has entered world trade
– Balance of payments deficits have continued – projections
assumed balance by 2000
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Manufacturing
Growth in net output
Private services
1990-2010 projections:
Manufacturing 3%pa (observed 0%pa)
Private services 4%pa (observed 4%pa)
20
%pa
10
0
-10
-20
1970
1980
1990
2000
2010
years
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Issues for long-term economic
forecasting
• Persistence of imbalances – e.g. balance of
payments deficits
• The inherent instability in the global
financial system (.com and banking
collapses)
• Effects of changes in relative prices e.g. manufactures and services
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% GDP
UK Balance of Payments (%GDP)
3
2
1
0
-1
-2
-3
-4
-5
-6
1970
1990 projections
UK’s Series1
chronic
deficit
1980
1990
2000
2010
years
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Economic shocks and long-term
projections
• Major shocks 1990-2020:
– Collapse in UK property values: 1992 Canary Wharf bankruptcy
– Global .com bubble from 1995 and bursting in 2000
– 2008 global banking collapse
• There is always a risk that any particular projection
year will be affected by an unforeseen shock
• Imbalances can build up in the financial system,
such as those leading to the 2008 crash, but exact
year difficult to predict
• Lesson: give warning about such risks and an
estimate as to whether they are changing and why
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Changes in relative prices
• Some services are labour intensive with
fewer opportunities for the substitution of
labour by equipment
• As globalization proceeds, prices of
imported manufactures, e.g. from China,
have been falling and imports increasing
• Use of 1985 prices to weight sectoral output
in the 1991 projections exaggerated the
importance of manufacturing shares
• Employment share was a more reliable
guide
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Shares of total UK employment
manufacturing share
0.35
0.3
financial and other
services
shares
0.25
1990 projections
0.2
0.15
0.1
0.05
0
1970
1980
1990
2000
2010
Years
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Conclusions on 1990 projections
• Long-term projections rely on trends
continuing and projection year being
“average”, but 2010 is below this trend
• GDP and components were projected better
than 1980s trend
• Employment structural change from
manufacturing towards banking and finance
was correct but not strong enough
• Sectoral projections were distorted by use
of 1985 prices
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