BOE’s Haldane Says ‘Fair Cop’ to Getting Brexit Forecasts WrongBy
Bank’s chief economist concedes his profession is in crisis
Likens poor economic forecasting to record of weathermen
Bank of England Chief Economist Andy Haldane has put his hand up to say his profession has a lot of work to do if it is to recover from its failed predictions over the global financial crisis and Brexit.
Forecasting methods worked before the financial crisis because the global economy was experiencing less volatility and “people were behaving broadly rationally,” the outspoken policy maker told an event in London on Thursday. “The problem came of course when the world was tipped upside down and those same frameworks were ill-equipped to make sense of behaviors that were deeply irrational.”
Haldane, who recently described economics as insular and self-referential, conceded that the discipline has been “to some degree in crisis” since the 2008 financial meltdown and the U.K.’s European Union referendum, with models proving to be “rather narrow and fragile.” The central bank was among institutions criticized by pro-Brexit campaigners during for being overly gloomy in its assessment of the impact of a vote to leave.
Haldane said it was a “fair cop” that the BOE -- in common with almost all mainstream forecasters -- expected a sharper slowdown, though officials haven’t changed their view of how leaving the EU will affect the economy over the long term.
The BOE’s predictions and its responses are set to stay in focus this year. U.K. lawmakers have started a review of the effectiveness of the bank’s aggressive policy loosening after politicians including Prime Minister Theresa May questioned its adverse side effects.
Parliament’s Treasury Committee will also look at the potential risks to the BOE’s operational independence. Governor Mark Carney came under fire in 2016 and got embroiled in controversy surrounding the Brexit vote for comments that some said were too political.
Haldane likened the poor forecasting record of economists before the financial crisis to the case of Michael Fish, a British weatherman who in 1987 downplayed the chance of a hurricane hitting the country.
“Apparently a woman rang the BBC and said she heard there’s a hurricane on the way. Well if you’re watching, don’t worry, there isn’t,” Fish said at the time. “The weather will become very windy but most of the strong winds incidentally will be down over Spain and across into France.”
Within hours, the U.K. was hit by what became known as the “Great Storm,” in which a number of people died.
Haldane said in economics before the 2008, the view was: “There’s no hurricane coming, but it might be very windy in the subprime sector.”
— With assistance by Scott Hamilton, Lucy Meakin, and Jill Ward