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Brexit vote was Bank’s ‘Michael Fish moment’.
The FTSE 100 surged after the referendum in June to reach a record high by the end of the year
Britain ended last year as the strongest of the world’s advanced economies with growth accelerating in the six months after the Brexit vote.
Business activity hit a 17-month high last month, meaning that the economy grew by 2.2 per cent last year — more than the six other leading nations, including the US, Germany and Japan.
Far from slowing after the referendum in June, as predicted by the Treasury and Bank of England, growth appeared to have improved. GDP grew at 0.3 per cent and 0.6 per cent in the first two quarters of last year, compared with 0.6 per cent and an estimated 0.5 per cent in the final period.
Andrew Haldane, chief economist at the Bank of England, suggested that economic forecasters were facing a “Michael Fish moment” over their mistaken predictions. Mr Haldane, comparing the profession’s failure to spot the 2008 recession to Fish’s infamous assurance of “no hurricane” on the eve of the great storm of 1987, said yesterday: “It’s a fair cop to say that the profession is to some degree in crisis.”
He also admitted to shortcomings in pre-Brexit predictions, saying that “the data has surprised to the upside”.
He insisted that the Bank’s errors were “more a question of timing than of a fundamental reassessment of the fortunes of the economy” and warned that inflation would squeeze household incomes this year.
He said that a slowdown was still likely. The Bank is forecasting growth this year of 1.4 per cent, which would put the UK in the middle of the G7. However, Steve Baker, the Brexit-supporting MP, said that the performance of the economy since the referendum was a reproach to those who warned of dire consequences. “This is another moment to reflect that the horror stories that we were told simply didn’t come to pass,” he said.
An assessment by Cambridge University criticised “flawed and partisan” Treasury forecasts of Britain’s economy outside the EU. Only one, the fall in sterling, had proved correct, according to the Centre for Business Research. Treasury predictions on the prospects of trade outside the EU came in for particular criticism in the academic assessment published last month.
“We have looked very carefully at what the Treasury has said about this and we find its work very flawed and very partisan. It is not objective,” Graham Gudgin, one of the authors of the report, said.
Britain’s robust performance means the economy heads into 2017 on solid ground. James Knightley, UK economist at ING Financial Markets, said that it “indicates that the UK economy has strong momentum”.
The purchasing managers’ index survey of business activity across the services, construction and manufacturing industries also pointed to further hiring by companies. It was released before official GDP data for 2016 as a whole on January 26.
Recruitment across all three industries accelerated at the fastest pace in 11 months and, in a positive sign for the months ahead, new orders in the services sector, which accounts for four fifths of the economy, hit a 17-month high. Chris Williamson, chief business economist at IHS Markit, which produces the survey, said: “The UK economy ended 2016 on a high. Hiring has also revived alongside upturns in new orders and business confidence.”
Using historical comparisons of PMI surveys and official GDP numbers, he said that the survey pointed to growth in the final quarter of 0.5 per cent.
December’s PMI reading for services, which was jointly produced with the Chartered Institute of Procurement & Supply, rose from 55.3 to 56.2, with any figure over 50 indicating growth. It beat forecasts of 54.7 and was the strongest since July 2015. It took the composite index of all private sector activity, including manufacturing and construction, to 56.7, a 17-month high.
Mr Williamson warned that the strong growth rate and signs of rising inflation could force the Bank to raise its official rate from the record low of 0.25 per cent. “All of which adds weight to the argument that the next move by the Bank of England is as likely to be a rate hike as a cut,” he said.
Economists also warned that economic conditions this year were expected to deteriorate. Higher inflation will eat into pay packets, potentially depressing consumer spending, and the triggering of Article 50 in March may provoke business into cutting investment plans because of the uncertainty. “A moderation in growth in 2017 seems likely,” Scott Bowman, UK economist at Capital Economics, said. “Our forecast is for GDP growth to ease from around 2 per cent in 2016 to about 1.5 per cent in 2017.”
Regarding the Brexit negotiations, a Treasury spokeswoman said: “We want the best outcome for Britain. That means pursuing a bespoke arrangement, which was not what the Treasury’s pre-referendum analysis was based on.
“This will give British companies the maximum freedom to trade and enables us to decide for ourselves how we control immigration.”