Why consensus is too gloomy on the UK
- Forecasters are too often too pessimistic on the UK. Reality is often better than predicted
- With a new government explicitly focusing on growth, expect many economists to find reasons to change their gloomy prognosis of the UK economy
- For investors, the main beneficiary is likely to be the pound – particularly against the euro
The last set of UK GDP released showed 0.4% growth for May, double the level of expectations. The most interesting feature is not specific to the month of May but rather that this type of “upside surprise” happens more often than not. In other words, UK growth forecasts are often too cautious.
Our analysis of the accuracy of UK economic forecasts suggests too much pessimism has been a consistent theme.
Going back to 2010 (excluding the Covid years which saw wild swings in data), we compared predictions made at the start of each year against the eventual outturn. What we found was that about 70% of the time the forecasts made 12 months prior were too low. The pattern of low expectations was longstanding and on average GDP growth was about 0.4% better than expected
UK growth frequently exceeds low bar of consensus expectations
(UK GDP growth consensus 12 months prior. Excludes Covid years)
Source: Columbia Threadneedle, Bloomberg, 17 July 2024
Of course, the story in the UK has been a tough one for forecasters; the credit crunch, the eurozone debt crisis, Brexit, Covid, inflation, etc. have all provided reasons for economists to peg UK growth low – just to be on the ‘safe side’.
The new government has a chance to change the narrative and the explicit embrace of ‘pro-growth’ policies is an opportunity to raise the low bar of consensus expectations.
Economists already seem to be listening. Since the election, expectations for 2025 and 2026 have been lifted. The revisions so far – increasing GDP growth forecasts by 0.1% – are likely to be just the start of a bigger shift, given the size of the historical overshoots. Put another way: we expect more economists to find excuses to sharpen their pencils and revise growth expectations upwards, reflecting a new UK government talking loudly about wealth creation.
2025 & 2026 expectations have already been revised up...
(UK consensus expectations for 2025 & 2026, YoY GDP growth)
Source: Columbia Threadneedle, Bloomberg, 17 July 2024
In some senses this is merely a change in the narrative – not a change in reality. But for markets, that matters (even if reality remains much the same). It brings with it the potential for increased investor flows, for example into the pound. We think sterling against the euro is likely to be a beneficiary of the changing fortunes of the shifts in consensus expectations. Two weeks into the reign of the new government, GBP/EUR was at 1.19, only 4-5% higher than in the month following the drama of the UK mini budget and the end days of Liz Truss’s premiership. With the current mark ups to the outlook for UK growth only in initial moves, we’d expect further gains against the euro.
Of course shifting expectations is the easy win. Consensus was too low to begin with. Reality is a different challenge altogether. Nevertheless, cheers to the “boost to growth” in whatever way it happens.
