Belfast Telegraph

John Simpson: Puzzle of predicting Brexit impact remains unsolved

Analysis

Irish dilemma: a no-deal will lead to a border
Irish dilemma: a no-deal will lead to a border
John Simpson

By John Simpson

The headlines have been carrying a worrying message: Northern Ireland will be the region hit hardest by Brexit. That conclusion merits a careful look at precisely what has been said. Is there evidence on which the conclusion can reasonably be based? Has the statement been based on clear assumptions about the circumstances affecting the conclusions?

Since the EU referendum was held, two overlapping features have done a serious disservice to the discipline of economics. First, the anticipated implications of the EU referendum were badly reported.

Would Brexit lead to a major economic collapse in the UK economy as some headlines suggested? Second, how reliable can economic forecasts be and do questions of reliability mean that professional forecasts are a waste of time?

Some UK commentaries have, unfairly, been mischievously critical. For Northern Ireland the commentaries have tended to quote headlines with little regard to the basis on which the comments are based.

In short, the foresight offered by professional analysis of events in the local or national economy has been reported in terms that have been sometimes excessive and sometimes misunderstood.

As a defence, one conclusion should be accepted before there is debate about more detailed comments. Economic forecasting will always be subject to margins of error, not necessarily errors that can be avoided but errors from the unpredictability of the behaviour of people, businesses and Governments.

A second qualification is also merited. Economic forecasting becomes more hazardous the further ahead the assessment is looking.

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As a much younger economist some of my learning experience for more than one government (but including a period at HM Treasury) was helping to give advice on current economic trends and their implications for taxation and spending policies. Critically, the focus was essentially on economic management over the next 2-3 years: essentially short-term forecasting.

Short-term economic forecasting was a developing science and an art form. Today, the official Office of Budget Responsibility (OBR) delivers a well-regarded equivalent. Short-term economic forecasting has the relative advantage that it attempts to measure trends that are more predictable.

Longer-term forecasts must be vulnerable to major events, significant innovation and international crises.

The possibility of major exogenous changes means that longer-term forecasts cannot adequately anticipate big exogenous changes. To that extent, long term forecasts will always be at risk. That does not make them valueless. Longer-term macro-modelling will help to aid understanding of some of the most unhelpful forecasts of what Brexit would mean.

In the months after the referendum, pessimism about the outlook gained headlines, followed some months later, by saying that the pessimism was wrong. The economy kept growing therefore the pundits were 'proved' wrong. That was a misunderstanding. The forecast was trying to say what would happen after Brexit was fully implemented. Even now, Brexit has not yet been implemented so that the economic forecasts should not be judged until Brexit is finished.

Another recurring problem has been forecasts of an impact on the economy where the forecasts are based on specific (sometimes not adequately acknowledged) assumptions. If the UK leaves the EU with an agreed withdrawal agreement, and a continuing transition period, the economy may remain stable. If the withdrawal is without a deal, there will be unwelcome damage to the economy. Many of the most serious withdrawal forecasts are being reported without adding that they are being presented assuming the absence of an agreed deal.

Northern Ireland has been particularly vulnerable to this confusion. Yes, we may expect to lose jobs, see some businesses shift to other places and (if there is no deal) the re-emergence of a land border with some cross-border technical requirements.

The no-deal situation will mean that, whatever the many months of UK-EU efforts to avoid either a hard or soft border, in default, there will be a border. Even an agreed EU-UK objective of a frictionless border has proved beyond the best of human ingenuity.

Belfast Telegraph

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