Why is there a gap between economic forecasts and what businesses are seeing on the ground?

It is a question which is being asked within companies all across the country. It is even being asked if economists any longer understand the real dynamics taking place.

The answer is of course they do but this has become a clear problem ever since Brexit in 2016. The Bank of England then apologised for getting its forecasts wrong and part of the problem is that many economists are finding new data sources which may be providing more information but also seems to be creating a lack of accuracy?

The same issue has been seen in many political elections when the results have been out of sync with the pollsters. It is not a new issue. In January 1984, President Reagen noted “I hope you’ll keep in mind that economic forecasting is far from a perfect science. If recent history’s any guide, the experts have some explaining to do about what they told us had to happen but never did.

So, may ask, what data do we trust? The answer coming from business is our own. In conversation last week, a quote was recited which summed up how many do feel when a CEO was reported to note that they “had never felt as optimistic in a period of reported doom”.

The last few years, not just the pandemic, but even the years leading up to the last financial crash have shown that often forecasts can be wrong. EP hosted a forum in the spring of 2008 when a major bank denied that there were storm clouds of the horizon even though a number of leading industry figures were openly noting that they were concerned that a large recession was impending. The actual crash did catch many by surprise and it did happen relatively quickly. There were for a couple of strange weeks even talk of a run of a couple of banks.

Forecasts are far from a perfect science and arguably it has become more difficult in hospitality as the consumer too is changing their natural habits. Many have continued to spend and many also have a very different mind-set to past eras. Many are saving less, living off debt and changing their priorities. In 2019, the level of unsecured debt as a share of household income is now 30.4%, the highest level it had ever been at. Has this markedly changed since 2019?

It does, of course, leave many vulnerable to even the slightest of economic changes but fortunately, the news coming from businesses all across the country has bene more positive. Part of this has been less a fear of recession but a relief that at least al can trade without restriction. Many companies have learnt how to battle through against the odds during the pandemic. Now they are breathing and beginning to fire once again.

It is one of the exciting aspects of this challenging period. Many are looking at changing the rules, even creating new rules, as they rebuild their businesses.

Of course there are deep challenges to be faced but at least the psychology from businesses is that they are ready for the battle and feeling more confident.