connecting you to the future assessing “britain in 2010” (1991): the economic projections and...

connecting you to the future

Assessing “Britain in 2010” (1991):The Economic Projections and Outcomes

PSI Conference on “Back to ‘the future’: Assessing Britain in 2010” Date and time: Wednesday 12 May 2010 from 2pm - 5pm

Venue: RSA, 8 John Adam Street, London, WC2N 6EZ

Terry Barker Cambridge Econometrics & University of Cambridge 12 May 2010


Background to the projections

• PSI approached Cambridge Econometrics (CE) to provide long-term projections for the UK economy

• CE had developed through the 1980s an industrial forecasting service supplying annual projections up to 10 years ahead twice a year for – GDP, and other macroeconomic variables

– output and employment by some 40 industries

• The projections were based on the Multisectoral Dynamic Model (MDM) originally built at the University of Cambridge


How the projections were made

• The model (MDM) was estimated on time-series data and input-output tables, so that it simulated the annual change in the economy at a sectoral level, with totals being formed from the detail

• With a set of assumptions about world growth, population, oil supplies and economic policy, the model could solve into the future

• The model is open in the sense that it allows the balance of payments to remain in deficit and unemployment to persist– The deficit fell in the projections due to faster rate of growth of

EU single market

– And unemployment gradually reduced to below 1m by 2010


Changes in expenditure components of GDP: projections and observed 1990-2010

based on 1970-90 (%)1985 prices

1990-2010projection (%) 1985 prices

1990-2010

observed (%)1985 prices 2005 prices

Consumers’ expenditure

76 46 95 (60 ex IT) 55

Government

expenditure

39 46 43 55

Fixed investment

50 64 58 41

Exports 123 121 117 116

Imports 144 96 149 129

GDP 57 56 67 47


Assessment of the GDP projections

• Price basis makes a substantial differences

• Observed 2010 GDP and components well below trend because of 2009 “Great recession”

• Consumers’ expenditure and imports affected by IT

• Fixed investment especially low in 2010 – collapse in housebuilding and commercial building

• Exports and imports grow much faster than GDP as expected, but imports are well above projection– Slow growth in prices as China has entered world trade

– Balance of payments deficits have continued – projections assumed balance by 2000


Growth in net output

-20

-10

0

10

20

years

%pa

Manufacturing

Private services

1970 1980 1990 2000 2010

1990-2010 projections:

Manufacturing 3%pa (observed 0%pa)

Private services 4%pa (observed 4%pa)


Issues for long-term economic forecasting

• Persistence of imbalances – e.g. balance of payments deficits

• The inherent instability in the global financial system (.com and banking collapses)

• Effects of changes in relative prices e.g. - manufactures and services


UK Balance of Payments (%GDP)

-6-5-4-3-2-10123

years

% G

DP Series1

1970 1980 1990 2000 2010

UK’s chronic deficit

1990 projections


Economic shocks and long-term projections

• Major shocks 1990-2020:– Collapse in UK property values: 1992 Canary Wharf bankruptcy

– Global .com bubble from 1995 and bursting in 2000

– 2008 global banking collapse

• There is always a risk that any particular projection year will be affected by an unforeseen shock

• Imbalances can build up in the financial system, such as those leading to the 2008 crash, but exact year difficult to predict

• Lesson: give warning about such risks and an estimate as to whether they are changing and why


Changes in relative prices

• Some services are labour intensive with fewer opportunities for the substitution of labour by equipment

• As globalization proceeds, prices of imported manufactures, e.g. from China, have been falling and imports increasing

• Use of 1985 prices to weight sectoral output in the 1991 projections exaggerated the importance of manufacturing shares

• Employment share was a more reliable guide


Shares of total UK employment

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

Years

shar

es

manufacturing share

financial and otherservices

1970 1980 1990 2000 2010

1990 projections


Conclusions on 1990 projections

• Long-term projections rely on trends continuing and projection year being “average”, but 2010 is below this trend

• GDP and components were projected better than 1980s trend

• Employment structural change from manufacturing towards banking and finance was correct but not strong enough

• Sectoral projections were distorted by use of 1985 prices

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