Sadly, the forecasts were right

THIS year has been an annus horribilis for economic forecasters. We far from happy few got it more or less right. But most predictions have proved useless, whether for the world, the US or the EU - though curiously not for Britain.

In January, the American consensus for this year was 2.5% growth. This was steadily ratcheted down as the recession set in - only three months later, according to the US authorities' retrospective analysis. The outturn is now expected to be 1%.

Eurozone predictions fared no better. The European Central Bank started the year predicting growth of more than 3%. Just over 1% is the likely figure.

Why were expectations so inaccurate? One US problem was that Alan Greenspan's Federal Reserve was seen as infallible. Between mid-1999 and last January the Fed raised interest rates six times, suggesting a fear of boom not bust.

After that came the swift U-turn and with rates cut 11 times to a 40-year low. The markets were so optimistic a year ago that they foresaw no interest rate cuts until May.

The infallibility of the Fed was also assumed when signs of recession came. If there was one, it was wrongly believed, it would be shallow and short.

In the eurozone the view persisted, sometimes superciliously expressed, that as a largely self-contained trading area it would remain mainly immune to US problems. The forecasts for the US missed many warning signals. They treated the crash in internet and hightech stocks as a sideshow. Yet it destroyed vast amounts of capital which will take time to rebuild.

They also paid little attention to the fact that a year ago (you read it here) the number of banks tightening lending was at its highest for nearly a decade. Tumbling commercial bond prices underlined the difficulty firms had in borrowing. Too little notice was also taken of emerging surplus capacity, which is bound to clobber business profits.

Forecasters seemed to believe as well that Greenspan had in some magic way abolished the trade cycle. My suggestion a year ago was that the Fed would need to cut interest rates vigorously and that the odds on a hard landing would be more than 50%. Correct, unfortunately.

Eurozone errors owed much to bad forecasting by the European Central Bank and finance ministers. This brings us to a common source of error. Politicians and most central bankers like to give the impression that their efforts will lead to prosperity (and re-election in the former case). In short, they have a vested interest in optimism.

The same problem is liable to occur with the economic gurus working for broking houses whose purpose is of course to sell stocks.

Britain by contrast is more or less meeting the Treasury's Budget-time forecast for growth. Many of us who got the wider picture right have proved too pessimistic, assuming that as a major trading nation we could not be immune from the wider recession. The outcome is much to the credit of Chancellor Gordon Brown and the Bank of England.

Yet that apparent immunity remains a puzzle. Of course we have flexible labour markets unlike the eurozone and our economic and stock market bubble was small compared to the US. Perhaps, held aloft by consumer spending, Britain has only postponed the effects of the worldwide recession.

Those of us who got the American economics right were often wrong about the stock market. Share prices have fallen but by less than one would expect, given slumping profits. No doubt US investors harkened to their economists' rosy views. But even these gurus are now very cautious and see growth next year of merely 0.7%. Interesting time, alas.