Knowing and Making

Two articles this evening lead me to ask the question: how do we predict GDP growth? Before reading on, why not ask yourself this question: what do you expect next quarter's GDP growth figures to be? How about the next 12 months? And why? I'd be interested to see some of your answers in the comments to this post - please also say which particular GDP figures you're predicting (personally I'm most familiar with the UK and US figures, but would be interested in comments from the eurozone and other regions too)*. I'm not going to test you on the accuracy of your forecasts: I'm more interested in the prediction itself, and your reasoning, than whether it turns out to be right. My prompts for thinking about this are: a paper Roger Farmer sent me this evening, introducing the concept of a belief function  describing what people expect next year's growth and inflation figures to be David Smith's blog excerpt of his Sunday Times column today , in which h...

Andrew Sentance (yes, sorry about that) writes in the Sunday Times about inflation and in particular, why it is stubbornly high in the UK compared to the rest of the world. Taking out the VAT rise, strong oil price and fall in the pound, he notes that: It appears that instead of pushing down significantly on cost and price increases, the impact of spare capacity on domestic inflation has been muted. Assuming this is correct - and we must remember that there is  an economic recovery under way, so we'd expect some inflation - we are left with an important question. Why is there so little spare capacity in the UK? It's important not just in order to keep inflation down. More deeply, it matters because real growth in the economy only happens when more productive capacity comes into use. If there is no spare capacity, we can't have growth until we invest in new production, and that takes time. Sentance points out that: Unemployment has risen to a lower level than...in t...

Some news has been creeping in which gives us a picture of the British economy that's gradually becoming clearer. First, from the ONS via David Smith : Business investment for the first quarter of 2010 is estimated to be 6.0 per cent higher than the previous quarter. From the same source, some news on public borrowing: ...in December, the Treasury preducted public sector net borrowing for 2009-10 of £178 billion on the definition it uses. The latest figures from the Office for National Statistics show a downward revision to the outturn, taking it to £156 billion...At one time people were predicting figures as high as £220 billion. Recent growth estimates are decent (though not outstanding) too: Gross Domestic Product (GDP) increased 0.2 per cent in the first quarter of 2010, compared with an increase of 0.4 per cent in the previous quarter. There was a concern prior to the release that growth might be negative, due to heavy snow in January and February. So growth of 0.2%, thou...

David Smith of the Sunday Times is talking about the property market : there are more buyers than sellers... It is a market, though. Trying to predict the balance between buyers and sellers over the next 12 months is hard Just how hard? Here's my prediction: there will be exactly the same number of buyers as sellers over the next 12 months. Working out how I came up with this prediction is left as an exercise for the reader.

From David Smith's column today: Economists are sometimes sceptical about consumer-confidence measures. What can consumers know that economists do not ? In the past couple of years, however, consumer confidence has tracked the road to recession well. What consumers know that economists do not is how much money consumers are going to spend. How much they're going to invest. How much risk they want to take. Consumer confidence is not a forecast of economic conditions by consumers (though it might be linked with that) - it's a primary data point governing consumer behaviour. One may as well object to the use of the Baltic dry-shipping index as a predictor of GDP by asking what a ship knows that an economist does not. Apparently, quite a lot.