We can't predict recession, says Bank of England deputy governor Charles Bean

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Quote:In a frank speech to the Royal Statistical Society, the deputy governor of the Bank of England conceded that in August 2008 the Bank put the chances of an economic contraction of more than 1.5pc at just “1 in 20”.

“It is a fair bet that, if we had, then we would have put the chances of a contraction as large as the ONS’s current estimate of 6pc as being virtually negligible,” he said.

He stressed that the Bank was not alone in its failure to see the scale of the Great Recession, as others have labelled the 18 months of negative growth from March 2008. “Almost all forecasters were in the same boat,” he said.

Mr Bean added that the Bank should not be expected to predict the next big recession, either. “The moral from this is that one should not expect to be able to predict the timing and scale of these sorts of events with any precision,” he said.

In a damning comment on the models used by central bankers and other economic forecasters, he said the best they can hope for is to “be more alert to the vulnerabilities” building up to a crisis.

“It is somewhat analogous to seismologists trying to predict earthquakes along a fault line,” he said. “It is impossible to predict the day and magnitude of a shock with any precision, but it may be possible to say something about the likelihood of an earthquake occurring within a given period from seismic measurements and indicators of latent stress.”

His comments suggest that countries can not ever prepare properly for recessions because the scale and timing will always take forecasters by surprise. The only recessions that are “broadly predictable” are those that “are deliberately policy-induced in order to squeeze inflation down”.

Even then, however, “it may still be difficult to get the magnitude and timing right, and there will always be other unexpected events that perturb the path of the economy”, Mr Bean said.

“Downturns associated with financial or banking crises are rather different animals,” he said. “One would need to be endowed with perfect foresight to have been able to predict how the financial crisis would unfold.”

While forecasters may not be expected to get it right all the time, the past recession demonstrates that “financial institutions and policymakers could – and should – have been more alert to the vulnerabilities that were building during the years leading up to the crisis and therefore to the possibility of a major shock to the financial sector and to the economy more generally”.

To ensure that policymakers are more aware of a brewing storm in the financial system in the future, “financial data collection will need to be more flexible,” he said. “Almost certainly the seeds of the next financial crisis will sprout in a different corner of the financial system from this one.”

http://www.telegraph.co.uk/finance/econo...-Bean.html