David Blanchflower: Why isn't the Bank more transparent?

Economic Outlook: A big concern is that the Bank provides little detail of its forecasts, and no information at all on its new Compass model

It was always going to come to this. The Monetary Policy Committee threw up its hands last Wednesday and gave up the charade that all was going to be well by 2015. It finally had to admit its growth forecasts have been overly optimistic for years and is forecasting the UK economy is heading back into triple-dip recession. To quote from the Inflation Report: "In Q3, output increased by 1 per cent. In Q4, that growth rate seems set to fall sharply as the boost from the Olympics is reversed; indeed, output may post a small decline".

The growth forecast was considerably less optimistic than the one produced in August, which I criticised at the time for being from Cloud Cuckoo Land. And so it has turned out. The chart on the right above shows their latest forecast for growth in the form of their now infamous GDP growth fan chart, which is conditioned on Bank Rate remaining at 0.5 per cent and with £375bn of asset purchases. This shows that the MPC expects growth, shown by the dark swathe in the centre of the fan on the right, of only 2 per cent in 2015 compared with their earlier forecasts of 3 per cent and more. The MPC is forecasting that the drop in output of 6.3 per cent that occurred from 2008Q2 through 2009Q2 will not now be restored before mid-2014, six years after the recession started. In contrast, the drop in output in the 1930s, which was around 8 per cent, was restored in four years.

The so-called "backcast" to the left of the horizontal line shows the official ONS data. And the fact that the green fan lies close to that line means the MPC doesn't share the views of the "recession deniers" that the latest downturn was a statistical chimera that will eventually be revised away. Such claims, of course, were never credible given that, over the last 10 years, the average quarterly revision by the ONS has been zero.

It is clear from Sir Mervyn King's comments at the press conference that most of the changes to the outlook come from a change in the committee's judgements about the chances of very positive outcomes. Some decline in growth of course comes from the rise in inflation, which acts to depress real wages and hence consumption. One of the major differences, though, compared with the August forecast is that in the new forecast the fan only goes up to 4 per cent, whereas in the previous one it went close to 6 per cent, which I criticised at the time as highly unlikely. In both forecasts the fan stops below at around minus 1 per cent. To quote Sir Mervyn directly from the press conference: "The chances of a rapid recovery are a good deal less than we thought. So in our previous fan charts we did have some probability attached to pretty rapid recovery growth rates of 4 per cent or more. I think we feel that the persistence of the weakness in the world environment has been such now that we attach much less weight to those very rapid growth outcomes; though we don't attach any greater weight to much weaker out-turns". The forecast does certainly look more plausible now. A worry is that it still may be too optimistic.

A big concern is that the Bank provides little detail of its forecasts, and no information at all on the new model it has started using, called Compass. David Stockton in his recent review of the Bank's forecasting performance pointed out: "Compass has now been in active use by the staff as input into the forecast for nearly a year. However, interested parties outside the Bank have little to no understanding of the model and its key features." The Oxford economics professor Simon Wren-Lewis on his Mainly Macro blog* observed that "when monetary and fiscal policy was in the hands of the UK Treasury, the Treasury model was subject to detailed scrutiny". He goes on to conclude that "it does seem regrettable that the Bank has been using a model to produce its forecast for a whole year that no one knows anything about".

An official Bank spokesperson told me: "Spencer Dale set out the Bank's modelling philosophy in a speech in March, and since then Bank staff have given presentations on the new model to colleagues at other central banks and to the IMF. We intend to publish a working paper setting out the model in detail, and give a programme of presentations at UK universities in the new year."

As Fed Governor Janet Yellen made clear this week in an important speech "a growing body of research and experience demonstrates that clear communication is itself a vital tool for increasing the efficacy and reliability of monetary policy". Bank of England take note; the time to be transparent is now.

On the same day as the MPC forecast, the ONS released the labour market data which showed the biggest rise in the claimant count for a year of 10,000 between September and October. The next day we had horrid retail sales numbers. That led David Kern, chief economist at the British Chambers of Commerce, to argue that "GDP will see a sharp slowdown in the fourth quarter".

So despite George Osborne's claim that the economy is healing, we are likely to see three quarters of negative growth, with one Olympics-driven quarter of positive growth followed by another negative one. Indeed, the economy shrank by 0.1 per cent over the last 12 months. Four out of five quarters of negative growth would stand in marked contrast to the US, which has had 13 quarters of positive growth in a row. To rub salt in the wound the credit rating agency Moody's suggested that if this happens the UK would likely lose its AAA credit rating. This represents a major problem for Mr Osborne, who seems to have believed that all would be well in 2015. That dream looks to be in tatters. I am looking forward to the Autumn Statement with much interest.

*mainlymacro.blogspot.co.uk

Suggested Topics
Voices
The Sumatran tiger, endemic to the Indonesian island of Sumatra, is an endangered species
voicesJonathon Porritt: The wild tiger population is thought to have dropped by 97 per cent since 1900
News
Gardai wait for the naked man, who had gone for a skinny dip in Belfast Lough
newsTwo skinny dippers threatened with inclusion on sex offenders’ register as naturists criminalised
Sport
Van Gaal said that his challenge in taking over Bobby Robson's Barcelona team in 1993 has been easier than the task of resurrecting the current United side
football
News
news
PROMOTED VIDEO
Arts and Entertainment
Beast would strip to his underpants and take to the stage with a slogan scrawled on his bare chest whilst fans shouted “you fat bastard” at him
musicIndie music promoter was was a feature at Carter gigs
Arts and Entertainment
Story line: Susanoo slays the Yamata no Orochi serpent in the Japanese version of a myth dating back 40,000 years
arts + entsApplying the theory of evolution to the world's many mythologies
News
Performers dressed as Tunnocks chocolate teacakes, a renowned Scottish confectionary, perform during the opening ceremony of the 2014 Commonwealth Games at Celtic Park in Glasgow on July 23, 2014.
news
Life and Style
Popular plonk: Lambrusco is selling strong
Food + drinkNaff Seventies corner-shop staple is this year's Aperol Spritz
Life and Style
Shake down: Michelle and Barack Obama bump knuckles before an election night rally in Minnesota in 2008, the 'Washington Post' called it 'the fist bump heard round the world'
newsThe pound, a.k.a. the dap, greatly improves hygiene
Arts and Entertainment
La Roux
music
Arts and Entertainment
Graham Fellows as John Shuttleworth
comedySean O'Grady joins Graham Fellows down his local Spar
News
people
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
Ross Burden pictured in 2002
people
News
Elisabeth Murdoch: The 44-year-old said she felt a responsibility to 'stand up and be counted’'
media... says Rupert Murdoch
Arts and Entertainment
tv
Extras
indybest
Sport
Arsenal signing Calum Chambers
sportGunners complete £16m transfer of Southampton youngster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Entry Level Fund Accountant (Edinburgh)

£17 - £20 per hour: Cameron Kennedy Recruitment: My client, one of the worlds ...

SQL DBA/Developer

£600 per day: Harrington Starr: SQL DBA/Developer
 SQL, C#, VBA, SQL Server, ...

Risk Analyst - VBA/EXCEL

£300 - £600 per day: Harrington Starr: Risk Analyst Access, EXCEL, VBA, RISK, ...

Market Access Analyst (FIX 5.0, Equities, Derivatives)

Negotiable: Harrington Starr: Market Access Analyst (FIX On-boarding, FIX 5.0,...

Day In a Page

The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
Countries that don’t survey their tigers risk losing them altogether

Countries that don’t survey their tigers risk losing them

Jonathon Porritt sounds the alarm
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz
A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

A new Russian revolution

Cracks start to appear in Putin’s Kremlin power bloc
Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

Apartheid’s sadistic killer that his country cannot forgive

The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

Standing my ground

If sitting is bad for your health, what happens when you stay on your feet for a whole month?
Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

Greene prays for chance to rebuild after injury agony

Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
Israel-Gaza conflict: Secret report helps Israelis to hide facts

Patrick Cockburn: Secret report helps Israel to hide facts

The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
The man who dared to go on holiday

The man who dared to go on holiday

New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

Best comedians: How the professionals go about their funny business

For all those wanting to know how stand-ups keep standing, here are some of the best moments
The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

The Guest List 2014

Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

Jokes on Hollywood

With comedy film audiences shrinking, it’s time to move on