Economic forecasts are often wrong, but they are still needed

No one predicted the drop in oil prices, but that will not deter the current crop of crystal-ball gazers
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John Kenneth Galbraith wrote that: "The only function of economic forecasting is to make astrology look respectable." That is a little harsh, and not only because were there no market for forecasts we would not have them. Economic forecasts are an essential part of all financial planning. A car company does not know how many cars it will sell in the coming year but it has to plan. If it has a reasonable expectation that economy A will boom and economy B will flatline then it can set targets for its dealers. If it can assume nothing, the targets become meaningless. You have to start from somewhere.

That "somewhere" this year – to judge by the run of forecasts for 2015 over the past few days – goes like this: for the UK there will be another year of decent growth, maybe not the 3 per cent canter of 2014 but something not far short of it. This will support further growth in employment and the first increase in interest rates from the revamped monetary policy committee at some stage during the year. The United States will show similar growth, probably around 3 per cent, and that too will lead to a rates rise.

However, elsewhere the economy will struggle: the eurozone will grow by 1 per cent at most and may well experience a few months of falling prices. So the European Central Bank will seek to boost both demand and inflation, probably by some form of quantitative easing. Japan will also struggle to generate much growth. But the emerging world – or rather those parts of it not dependent on energy and mineral exports – will do very well. China and India are big beneficiaries from the plunge in the oil price. For Russia it is a catastrophe.

That plunge was unpredicted. I cannot find a single forecast a year ago that put Brent below $63 a barrel. A year ago it was steady at around $110 a barrel and most assumed it would stick around there. So the most important single influence on the world economy this year went unpredicted. This is much more serious than the goofy forecasts on the British economy made by the International Monetary Fund in 2013 – if you recall, the chief economist there failed to spot the recovery and even used the phrase "playing with fire" to describe the coalition's fiscal programme.

This failure to spot the plunge in the oil price should make us cautious about those predictions for 2015 sketched above. But they are a useful template against which to test one's own ideas, for we all make forecasts even if we don't like to admit it to ourselves. So here are three big themes.

The first is that there are still several years of expansion ahead. Somewhere out in the future there will be another global recession, and these seem to come at roughly 10-year intervals. So the next peak is likely to be somewhere in the high teens – 2017, 2018 or 2019. It is very unlikely to be 2015.

The second is that differential growth within the developed world is embedded and will be very hard to shift. For reasons that I don't think anyone fully understands, English-speaking developed economies at the moment seem able to grow faster than non-English speaking ones. This won't last for ever, certainly if you take GDP growth per head as the benchmark rather than overall GDP. (Countries where English is widely spoken tend to have higher birth rates, the main exception being France.)

But for the time being that seems set, and another three years where the UK and US grow faster than the eurozone and Japan will change perceptions of the effectiveness of different approaches to economic policy.

The third is that the shift of economic mass towards the emerging world and away from the developed world is set to continue for many years to come. The past months have seen a substantial reassessment of this shift. The Brics are no longer high fashion. One of them, Russia, has fallen flat on its face. Another, Brazil, has just squeaked out of recession. Growth in China has slowed, albeit to something around 7 per cent. Only India is seen to be picking up pace and it is too early to judge whether this is a politically driven response to its new prime minister Narendra Modi rather that anything of substance. Many investors who bought the Bric boom story have had a miserable time. (By contrast, most of those that bought the American boom story have had a great year.)

But you have to put this in context. I have not seen a single forecast that suggests that, over the next five years, growth in the developed world will be higher than growth in the emerging world. The shift of economic might will continue, just at a slower pace.

If all this seems a bit bland, try this other quote from J K Galbraith, which might be appropriate for British voters. "Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable."