Monday, August 21, 2017

The 'Economists for Free Trade' group has produced a document, authored by Patrick Minford, suggesting that Brexit will provide considerable economic benefits to the UK. It is interesting how this group has changed its name so that it looks as though more than one group is saying the same thing as them - they were 'Economists for Brexit' a few months ago.

Minford's basic argument for free trade is one that most economists would support. Trade (whether international or just me going to buy a coffee) happens because it's an exchange that makes both parties better off - and restricting that trade makes us worse off. International trade can be restricted by tariffs, but also by a whole plethora of non-tariff barriers (eg regulations of various kinds).

Minford emphasises tariff barriers - and (curiously, since he reckons Brexit will ‘mostly eliminate’ UK manufacturing) has a very manufacturing oriented view on this. But he's way out of date. The World Trade Organisation works to reduce tariff barriers worldwide - and we already benefit from that. There are still some tariffs, sure, but this really isn't the main thing that impedes trade.

That impediment comes from regulations - and the single market has done more than anything to remove it. Leaving the single market would put a whole lot of new barriers in place.

We don't know exactly where Minford's latest figures come from – his group is reporting the research bit by bit to try to get more publicity. But he undertook a similar exercise before the referendum, and it was clear from that that his model was ill-equipped to do the analysis. Indeed that exercise was widely panned. The model they use assumes a reduction in VAT instead of a tariff cut. It also assumes that the burden of regulations will decrease (and rather curiously models that by assuming a fall in the employer's rate of national insurance). Now if the EU regulations that our exporters face when they sell to the EU could be magicked away just by us leaving the EU, there might be some case for doing that, but otherwise it's bonkers. No, let's just tell it like it is... it is just plain bonkers.

Here's a picture that the Resolution Foundation produced, showing the 'before the referendum' and 'after the referendum' forecasts of economic growth made by every forecaster surveyed by the Treasury in its regular compilation of UK forecasts. The red dot is the forecast in July 2016 (after the referendum), the blue dot in June (before). In all cases but one, the expected impact of Brexit is clearly negative. The one exception is Patrick Minford.

The BBC – which, during this August silly season has given much prominence to the Economists for Free Trade report – needs to take a long, hard look at itself. By following a remit on 'balance' that is designed for political balance during general elections, not referenda, it has provided a completely unrepresentative view of the technical aspects of Brexit. (Bizarrely, it does the same thing with climate change when it gives the likes of Nigel Lawson a platform.) Balance should apply when there is a discussion about values - and of course there are some values-based arguments surrounding Brexit, and that is perhaps where the confusion comes in. But on a technical issue, where the science is clear, cranks should be treated as cranks. This really is flat earth stuff.

Tuesday, August 15, 2017

The UK government has published a document on future customs arrangements with the EU, in which two possible models are floated. The first of these involves a ‘highly streamlined’ system in which existing procedures are largely maintained alongside ‘technology-based solutions to make it easier to comply with customs procedures’.

The second involves the UK mirroring EU procedures when imports that will subsequently be exported to the EU enter the UK – thus allowing seamless movement of products between the UK and EU. Just how anybody will know which imports will later be exported is anyone’s guess. The government’s document refers to ‘simplifications for business, such as self-assessment’… which sounds a lot like complications for business.

The opportunities that will exist to strike trade deals with third party countries undoubtedly offer the UK some potential to benefit. This comes, however, at a cost – most notably bureaucracy. Clearly the UK should not be able to import products from a third country with a tariff that is lower than that applied by the EU, simply to export them to the EU without tariff. But it might be possible for UK businesses to process these products and sell their output to the EU at zero tariff. A call must then be made in determining how much processing or modification is needed in order to qualify a product for tariff-free export to the EU. Hence the need for rules of origin. Devising and subsequently implementing these rules is a huge undertaking – though technology (elsewhere in the document described as involving a ‘risk-based and intelligence-led’ approach) can certainly, albeit with imperfection, help.

The first option presented by the government’s document could be highly streamlined indeed if the UK were to be free to strike its own trade deals but did not take advantage of that freedom, and if it inherited all the trade arrangements already made by the EU (unlikely though this scenario might be). The existing customs union would then remain in all but name. A somewhat less streamlined mechanism would allow exceptions, albeit at cost that would need to be balanced against the benefits.

Whatever final arrangements are agreed, the UK government is proposing a transitional period. And – noting the British penchant for solving problems by changing the name – whatever it is called, at least the transitional arrangements should look very much like the customs union that currently exists.

Thursday, August 10, 2017

Industrial production in June of this year stands at 0.3% above the level a year earlier. Despite the fact that output in June was almost 0.6% above that achieved in May, the trend is still one of rather sluggish performance. Indeed, my neural network forecaster predicts a return to negative growth in this series over the coming months. This ties in with recent predictions of slower GDP growth over the coming two years. As ever, caution is needed in interpreting these forecasts, especially given the unusually uncertain environment presented by Brexit negotiations.


Friday, July 07, 2017

The latest data on industrial production have been released and show slight falls (month on month, quarter on quarter, and year on year). This continues the recent trend. My neural network forecaster for this series suggests a likelihood of continued (quite sharp) falls over the coming months, followed by a recovery. The usual caveats apply, of course, especially given the major uncertainties presented by, amongst other things, the Brexit negotiations.

Friday, June 09, 2017

Industrial production fell by 0.8% over the year to April, with particularly sharp falls in the energy and consumer non-durables sectors. This follows forecasts of such a fall on this site in recent months. While the political landscape is now particularly uncertain, forecasting is more than usually hazardous, but the predictions of my neural network model for this series over the next 24 months are reported below.

Thursday, May 11, 2017

Data on industrial production indicate that output growth in this sector slowed in March to 1.4% year on year. This follows sharp declines in each of the previous two months, and on a monthly basis industrial output is now some 1.9% lower than its peak in December of last year. Since there was also a mini-peak in the series in April 2016, it would not be surprising if the year-on-year series were to turn negative next month.

The series, along with predictions for the coming two years from my neural network forecaster, appears in the graph below. As ever, forecasts should be treated with caution, not least given the present political uncertainties.

Friday, March 10, 2017

Following the substantial uptick in manufacturing output fuelled by sterling's depreciation at the end of last year, the January data indicate a month-on-month fall of some 0.9%. This has contributed to a month-on-month fall of 0.4% in total industrial output. Year-on-year, industrial output still shows a large rises, of some 3.2%.

The slowing of output in January leads to another major revision in my neural network forecast for this variable over the coming 24 months - illustrating again that forecasting in such volatile times is a hazardous activity. The latest forecast is shown below - and is clearly more consistent with forecasts produced over the course of most of last year than with the one produced last month.

Friday, February 10, 2017

The latest statistics on industrial production indicate that, compared with a year earlier, output in the production sector in December 2016 had grown by some 1.2%. This spurt of growth is new. Indeed, industrial output grew by over 3.1% over the last 2 months of 2016, following some earlier reverses. The main driver of this growth is in the manufacturing sector, which, over the course of the year, increased output by some 4 per cent. Growth in manufacturing since October has been particularly strong - at 3.5 per cent over the two months alone.

Using these data to update my neural network forecaster for industrial output means that - with the positive annual growth rates recorded in each of November and December of last year - the forecast is now for continued growth over the period to the end of 2018. The depreciation of sterling has clearly given manufacturing exports a boost, and while the series dipped in October of last year this dip has proved to be much milder and shorter-lived than anticipated. The uncertainties brought on by Brexit have clearly made forecasting an even more hazardous activity than usual!

Friday, January 06, 2017

Comments by Andy Haldane, chief economist at the Bank of England, comparing economic forecasts to the famous failure of Michael Fish to predict the October 1987 hurricane have been seized upon by the media. The relevant part of Haldane's commentary comes in the 5 minutes from 15m30s in this video.

A number of points are worth making about this. First, the specific forecasting failure that Haldane compares to Fish is that of the financial crash leading to the Great Recession. Some media outlets have suggested otherwise. Haldane does comment on the Bank's forecasts for the post-referendum period and notes that the economy has been more resilient so far than had been expected, but he continues to expect a relatively tough year in 2017.

Focusing then on the major forecasting failure in 2008, he identifies two contributory factors. The first (extending the analogy with meteorology) is a lack of data. With better data, better forecasts can be produced. The second is arguably more fundamental. As Haldane notes, the forecasting models tend to work well when the economy is close to equilibrium, but perform badly during the (more interesting) periods following a shock. They clearly need to be redesigned, and indeed are being redesigned, better to accommodate such extreme events. Much effort since the crisis has gone into developing macroeconomic models to include imperfectly operating housing markets, and it is likely that this effort will contribute to more successful forecasting in future.

That said, economies are made up of people with free wills, and forecasting in this context can never become an exact science. The forecaster's tools - be they VAR models, neural networks, DSGE models or whatever - allow the evidence to be marshalled systematically in order to produce informed estimates of the likely time paths of key economic variables. But they are informed only by what is known at the time of the forecast, not magically informed by data that are unavailable. That said, data on the vulnerability of the sub-prime sector were available in 2007, and it is certainly fair to say that these should have been given greater heed in forecasts.

However, while many laypeople consider forecasting to be a major part of what economics is all about, that perception is misleading. Most economics is based on generating hypotheses that are then tested on historical data. This allows some stylised facts to be determined, and helps us understand a complex world - for instance: production quotas raise the price of oil; or restricting trade is harmful to growth. The body of economic understanding that has developed in this way over many years is in no way challenged by the fact that (in common with everybody else) economists lack perfect crystal balls.