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Ever Felt That Financial Forecasters Are Making It Up As They Go Along?

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http://www.independent.co.uk/news/business/comment/ever-felt-that-financial-forecasters-are-making-it-up-as-they-go-along-9687727.html

What do you suppose is the most important statistical measure for those in charge of setting economic policy? GDP growth? The inflation rate? Unemployment? Guess again.

The figure is the level of slack in the economy, also known as the "output gap", or "spare capacity". Presented as a percentage of GDP, it represents the gap between the level of output and the economy's non-inflationary potential. When the figure is positive the economy can grow strongly without setting off an inflationary spiral. When the figure is negative, the economy is overheating and a damaging surge in prices is a danger.

Earlier this month the Governor of the Bank of England, Mark Carney, said the level of slack in the economy was greater than previously believed. That sent City traders scrambling to change their bets on the likely date of the first hike in interest rates by the Bank, pushing it back to next May. The value of sterling against the dollar also dropped sharply, again reflecting a sudden shift in market expectations.

The Office for Budget Responsibility (OBR), George's Osborne's official forecaster, has also been making waves over the past four years with its revisions of the size of the output gap. A succession of downgrades of the level of slack in the economy by the OBR have pushed up the size of the hole in the public finances and compelled the Chancellor to pencil in more future cuts in order to balance the budget. These revisions are a big part of the reason why a five-year programme of public sector austerity is now projected to last for just short of a decade.

The trouble is that economic slack can't be directly measured. Its size can only be inferred from other indicators. And those indicators are rather unsatisfactory, generally consisting of surveys of firms and workers. To put it crudely, policymakers have to guess.These guesses are contentious because of what happens if they are wrong. The Bank of England's latest collective estimate is that economic slack is about 1 per cent of GDP. But what if spare capacity is bigger than this? That implies the Bank could hold interest rates down for longer than the financial markets expect. That would result in faster growth, which would not be excessively inflationary. That, in turn, should mean faster wage growth. The Bank could harm living standards unnecessarily by tightening monetary policy prematurely.

Well the economically we are getting very good at computing imputed rent, it must be getting HMRC very excited working out what the tax should be on that figure.

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What do you suppose is the most important statistical measure for those in charge of setting economic policy? GDP growth? The inflation rate? Unemployment? Guess again.

For sure the output gap is important in setting policy - but in overt electioneering terms and in terms of trying to falsely persuade people that the UK's recovery is world beating then these days it's the (manipulated) GDP.

There's no need to guess.

Whether the output gap is actually he most important measure in setting economic policy is quite another matter. Policy for many years and decades suggests that the performance of their property portfolios and the property portfolios of their chums is paramount.

The figure is the level of slack in the economy, also known as the "output gap", or "spare capacity". Presented as a percentage of GDP, it represents the gap between the level of output and the economy's non-inflationary potential. When the figure is positive the economy can grow strongly without setting off an inflationary spiral. When the figure is negative, the economy is overheating and a damaging surge in prices is a danger.

Flim flam - trying to pretend a responsible policy.

The GDP and inflation figures are so distorted and manipulated would they themselves even know what the real level of inflation is never mind being able to identify when "a damaging surge in prices is a danger". With house prices they haven't in the past and so far they don't seem to be able to see the dangers that have been inherent in the London mega bubble.

It's no wonder the UK is so far down the GDP per Capita and GDP per Hours worked tables.

Edited by billybong

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You can tell that Economists are proper scientists by the way that everynumber or result they present always has a statistically calculated error margin, on the form of {mean} +/- [standard deviation} or alternatively as a range of results within 60% or 90% confidence.

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For sure the output gap is important in setting policy - but in overt electioneering terms and in terms of trying to falsely persuade people that the UK's recovery is world beating then these days it's the (manipulated) GDP.

There's no need to guess.

Whether the output gap is actually he most important measure in setting economic policy is quite another matter. Policy for many years and decades suggests that the performance of their property portfolios and the property portfolios of their chums is paramount.

Flim flam - trying to pretend a responsible policy.

The GDP and inflation figures are so distorted and manipulated would they themselves even know what the real level of inflation is never mind being able to identify when "a damaging surge in prices is a danger". With house prices they haven't in the past and so far they don't seem to be able to see the dangers that have been inherent in the London mega bubble.

It's no wonder the UK is so far down the GDP per Capita and GDP per Hours worked tables.

Nicely put.

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