What economists can teach journalists â and vice versa Royal ...
What economists can teach journalists – and vice versa
Royal Economic Society | Annual Lecture 2014
Stephanie Flanders
FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION
What economists can teach journalists
The difference between a cycle and a trend.
They both made the same mistake
Issac Newton
Gordon Brown
Born: 4 January 1643 Died: 31 March 1727
Born: 20 February 1951
The Treasury view of the pre-crisis years: not a boom but a step-change
UK real GDP from 1987-2007 In £ trillion 12.2 £ 10.2
How fast can the UK grow without triggering inflation ?
2001-2007: 2.75%
8.2
6.2
4.2
2.2
0.2
1986-1997: 2.55% 1997-2001: 3.06%
Getting it wrong on UK borrowing 1997-2007 Too pessimistic when world is getting better – too optimistic when world getting worse.
Getting it wrong on UK borrowing 1982-2007 Too pessimistic when world is getting better – too optimistic when world getting worse.
But economic forecasters have the same tendency
Out of 35 independent forecasts for UK growth in March 2008, only 1 predicted negative growth in 2008. Average forecast: +1.6% Actual out-turn: -6 per cent
What economists can teach journalists
The difference between a cycle and a trend.
The difference between a stock and a flow.
Debt is a stock
General Government Gross debt In billions of £
“....We
1700
have set out a plan – it lasts about six or seven years – to wipe the slate clean to rid people of the deadweight of debt that has been built up over time.”
1600
Nick Clegg
1500
“We’re
1400
debts.”
2000 1900 1800
1300 1200 1100 1000
Source: ONS, FactSet, J.P. Morgan Asset Management.
paying down Britain’s
David Cameron, 24 January 2013
UK debt is not going down, even as a share of GDP
UK net debt % of GDP
40 38 36 34 32 30 28 26 24 22 20
Source: ONS, FactSet, J.P. Morgan Asset Management.
Sometimes it’s the rate of change that matters...sometimes it’s the level.
UK GDP Trillions of GBP
10.02 9.62 9.22 8.82 8.42 8.02 7.62 7.22 6.82 6.42 6.02 5.62 5.22 4.82 4.42 4.02 3.62 3.22 2.82 2.42 2.02 1.62 Source:
ONS, FactSet, J.P. Morgan Asset Management.
Sometimes it’s the rate of change that matters...sometimes it’s the level. UK GDP Trillions of GBP
10 9.6 9.2 8.8 8.4 8 7.6 7.2 6.8 6.4 6 5.6 5.2 4.8 4.4 4 3.6 3.2 2.8 2.4 2 1.6 1.2 0.8
Source: ONS, FactSet, J.P. Morgan Asset Management.
nThis
has still been the slowest recovery on record.
nAnd
our economy is still at least 15% below its precrisis trend.
Spot the “handout”
Government debt levels Gross debt as % of GDP
Forecast
%
Italy Portugal Ireland US Spain France UK
Germany '05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
Source: IMF World Economic Outlook April 2014, FactSet, J.P. Morgan Asset Management. *Structural deficit is the cyclically adjusted budget deficit or the deficit that would prevail if the economy were running at full capacity. **Eurozone is change between 2013 and 2015 due to data availability. Guide to the Markets – UK. Data as at 30 September 2014.
This is not just an issue for the UK.
Real GDP developed markets Index 2010 = 100 120 Pre-2008 trend 115
110
Potential
105 Actual 100
95
90
Source: J.P. Morgan Economic Research, J.P. Morgan Asset Management.
....and it is making for a different kind of borrowing forecast error
UK net borrowing forecasts 2008-2014
2009-11: too pessimistic on borrowing, despite economy being a lot WORSE. 2012-14: too optimistic on borrowing, despite economy doing a lot BETTER
???
What economists can teach journalists
The difference between a cycle and a trend.
The difference between a stock and a flow.
The difference between a gift and a loan – or an asset and a liability.
Those Eurozone “bailouts”:
Spot the “handout”
Government debt levels Gross debt as % of GDP
Forecast
%
Italy Portugal Ireland US Spain France UK
Germany '05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
Source: IMF World Economic Outlook April 2014, FactSet, J.P. Morgan Asset Management. *Structural deficit is the cyclically adjusted budget deficit or the deficit that would prevail if the economy were running at full capacity. **Eurozone is change between 2013 and 2015 due to data availability. Guide to the Markets – UK. Data as at 30 September 2014.
Lessons for ECONOMISTS
All of the above. AND:
Being clear is just as important as being right. Both together can be tricky.
Quantitative Easing explained
?
Lessons for ECONOMISTS
All of the above. AND:
Being clear is just as important as being right. Both together can be tricky.
Group-think is an expensive occupational hazard
Group think is an expensive habit for economists and policy makers
Estimate of the proportion of MPC minutes devoted to discussion of “banking”
0.25 Northern Rock 0.2
0.15
0.1
0.05
0
Bank of England.
Lehman Bros.
Eurozone Crisis Draghi Speech
Lessons for ECONOMISTS
All of the above. AND:
Being clear is just as important as being right.
Group-think is an expensive occupational hazard.
The average can hide a lot of good stories which are also important.
What economists can teach journalists
The difference between a cycle and a trend.
Lessons for ECONOMISTS
All of the above. AND:
Being clear is just as important as being right.
Group-think is an expensive occupational hazard.
The average can hide a lot of good stories which are also important.
Politicians are not stupid. Usually. They are constrained.
And they are NOT the only ones who mistake the cycle from the trend.
Royal Economic Society | Annual Lecture 2014
Stephanie Flanders
FOR INSTITUTIONAL USE ONLY | NOT FOR PUBLIC DISTRIBUTION
What economists can teach journalists
The difference between a cycle and a trend.
They both made the same mistake
Issac Newton
Gordon Brown
Born: 4 January 1643 Died: 31 March 1727
Born: 20 February 1951
The Treasury view of the pre-crisis years: not a boom but a step-change
UK real GDP from 1987-2007 In £ trillion 12.2 £ 10.2
How fast can the UK grow without triggering inflation ?
2001-2007: 2.75%
8.2
6.2
4.2
2.2
0.2
1986-1997: 2.55% 1997-2001: 3.06%
Getting it wrong on UK borrowing 1997-2007 Too pessimistic when world is getting better – too optimistic when world getting worse.
Getting it wrong on UK borrowing 1982-2007 Too pessimistic when world is getting better – too optimistic when world getting worse.
But economic forecasters have the same tendency
Out of 35 independent forecasts for UK growth in March 2008, only 1 predicted negative growth in 2008. Average forecast: +1.6% Actual out-turn: -6 per cent
What economists can teach journalists
The difference between a cycle and a trend.
The difference between a stock and a flow.
Debt is a stock
General Government Gross debt In billions of £
“....We
1700
have set out a plan – it lasts about six or seven years – to wipe the slate clean to rid people of the deadweight of debt that has been built up over time.”
1600
Nick Clegg
1500
“We’re
1400
debts.”
2000 1900 1800
1300 1200 1100 1000
Source: ONS, FactSet, J.P. Morgan Asset Management.
paying down Britain’s
David Cameron, 24 January 2013
UK debt is not going down, even as a share of GDP
UK net debt % of GDP
40 38 36 34 32 30 28 26 24 22 20
Source: ONS, FactSet, J.P. Morgan Asset Management.
Sometimes it’s the rate of change that matters...sometimes it’s the level.
UK GDP Trillions of GBP
10.02 9.62 9.22 8.82 8.42 8.02 7.62 7.22 6.82 6.42 6.02 5.62 5.22 4.82 4.42 4.02 3.62 3.22 2.82 2.42 2.02 1.62 Source:
ONS, FactSet, J.P. Morgan Asset Management.
Sometimes it’s the rate of change that matters...sometimes it’s the level. UK GDP Trillions of GBP
10 9.6 9.2 8.8 8.4 8 7.6 7.2 6.8 6.4 6 5.6 5.2 4.8 4.4 4 3.6 3.2 2.8 2.4 2 1.6 1.2 0.8
Source: ONS, FactSet, J.P. Morgan Asset Management.
nThis
has still been the slowest recovery on record.
nAnd
our economy is still at least 15% below its precrisis trend.
Spot the “handout”
Government debt levels Gross debt as % of GDP
Forecast
%
Italy Portugal Ireland US Spain France UK
Germany '05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
Source: IMF World Economic Outlook April 2014, FactSet, J.P. Morgan Asset Management. *Structural deficit is the cyclically adjusted budget deficit or the deficit that would prevail if the economy were running at full capacity. **Eurozone is change between 2013 and 2015 due to data availability. Guide to the Markets – UK. Data as at 30 September 2014.
This is not just an issue for the UK.
Real GDP developed markets Index 2010 = 100 120 Pre-2008 trend 115
110
Potential
105 Actual 100
95
90
Source: J.P. Morgan Economic Research, J.P. Morgan Asset Management.
....and it is making for a different kind of borrowing forecast error
UK net borrowing forecasts 2008-2014
2009-11: too pessimistic on borrowing, despite economy being a lot WORSE. 2012-14: too optimistic on borrowing, despite economy doing a lot BETTER
???
What economists can teach journalists
The difference between a cycle and a trend.
The difference between a stock and a flow.
The difference between a gift and a loan – or an asset and a liability.
Those Eurozone “bailouts”:
Spot the “handout”
Government debt levels Gross debt as % of GDP
Forecast
%
Italy Portugal Ireland US Spain France UK
Germany '05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
'16
Source: IMF World Economic Outlook April 2014, FactSet, J.P. Morgan Asset Management. *Structural deficit is the cyclically adjusted budget deficit or the deficit that would prevail if the economy were running at full capacity. **Eurozone is change between 2013 and 2015 due to data availability. Guide to the Markets – UK. Data as at 30 September 2014.
Lessons for ECONOMISTS
All of the above. AND:
Being clear is just as important as being right. Both together can be tricky.
Quantitative Easing explained
?
Lessons for ECONOMISTS
All of the above. AND:
Being clear is just as important as being right. Both together can be tricky.
Group-think is an expensive occupational hazard
Group think is an expensive habit for economists and policy makers
Estimate of the proportion of MPC minutes devoted to discussion of “banking”
0.25 Northern Rock 0.2
0.15
0.1
0.05
0
Bank of England.
Lehman Bros.
Eurozone Crisis Draghi Speech
Lessons for ECONOMISTS
All of the above. AND:
Being clear is just as important as being right.
Group-think is an expensive occupational hazard.
The average can hide a lot of good stories which are also important.
What economists can teach journalists
The difference between a cycle and a trend.
Lessons for ECONOMISTS
All of the above. AND:
Being clear is just as important as being right.
Group-think is an expensive occupational hazard.
The average can hide a lot of good stories which are also important.
Politicians are not stupid. Usually. They are constrained.
And they are NOT the only ones who mistake the cycle from the trend.
