The consensus is still too optimistic - Capital Economics
UK Economics

The consensus is still too optimistic

UK Economics Update
Written by Andrew Wishart

Other forecasters were slow to appreciate the depth of the recession. Since then, the consensus GDP forecast has been revised down close to our own. But we think other forecasters are still underestimating how weak inflation will be, and how much further the Bank of England will expand QE.

  • Other forecasters were slow to appreciate the depth of the recession. Since then, the consensus GDP forecast has been revised down close to our own. But we think other forecasters are still underestimating how weak inflation will be, and how much further the Bank of England will expand QE.
  • We were one of the first forecasters to warn about the scale of the peak-to-trough fall in GDP that the coronavirus would cause. Our call, published in mid-April, that GDP would fall by 25% from peak to trough turned out to be exactly right. (See here and here.) Since then, other forecasters have revised down their GDP forecasts close to ours. (See Chart 1.)
  • Most forecasters have got unemployment wrong. Like the Bank of England and other forecasters, we had expected a surge in the unemployment rate to over 8% in Q2. (See Chart 2.) But there was no sign of this in April, when it was unchanged at 3.9%. (See here.) There are two reasons for this. First, those who have lost their jobs don’t have any hope of finding a new one until the economy reopens, so they aren’t looking for work which means they are classified as inactive rather than unemployed. Second, the furlough scheme has been more successful than anticipated, keeping just over nine million people in employment. But we suspect higher unemployment has just been delayed as opposed to avoided altogether, although the peak may be lower too. (See here.)
  • The big difference is that we think inflation will be well below the consensus forecast. Weak demand will linger after the economy has reopened. And in recent years, inflation has failed to pick up much even when the economy has appeared to be operating at full capacity. So while everyone else thinks inflation will rise back towards the 2% target, we forecast that it will languish closer to 1%. (See Chart 3.)
  • That’s why we think that the Bank of England will do more to support the economy than anyone else currently expects. That is most likely to come in the form of a further £350bn of quantitative easing (QE) taking the stock to a shade under £1 trillion. (See here.) Most other forecasters expect the £100bn of further QE that the Bank of England will probably announce at noon today to be the last move. (See Chart 4.)

Chart 1: GDP Forecasts (Q4 2019 = 100)

Chart 2: Unemployment Rate Forecasts (%)

Chart 3: CPI Inflation Forecasts (%)

Chart 4: Forecasts for the Stock of QE Purchases (£bn)

Sources: Bloomberg, Focus Economics, HMT, Capital Economics


Andrew Wishart, UK Economist, +44 7427 682 411, andrew.wishart@capitaleconomics.com