The economy in 2011: what the forecasters say

We look at the forecasts for this year, and the records of the forecasters, and explain what a growing economy actually means.

The consensus of economists is that our economy will grow 1.7% this year, but when we talk about a growing economy, what does that mean exactly? It doesn't mean more accountants and bankers are born, planted or nourished (although more monkeys may be hired and put into action in the times when the financial sector is happily blowing a massive bubble).

A growing economy also doesn't mean that prices are rising or that we're necessarily getting richer, even if it’s typical for both to happen alongside economic growth. So what does it mean?

The economy is made up of the stuff we produce, including services we provide. The total value of all that stuff is our economy, and the higher that value, the larger our economy is. This is measured as gross domestic product (GDP). When we talk about the economy – or GDP – growing by 2%, it means the value of everything we produce has gone up by that amount. This is usually adjusted for inflation to reflect real growth and not merely rising prices.

One of the main benefits to individuals in a large and growing economy is that we need to hire more people to make things. In 2004 the economy grew just a modest 3% but we ended the year with more than 200,000 extra jobs. In 2005 the economy grew only 2% but we ended the year with 300,000 more jobs. Keep that going for a few years and with our ageing population the unemployment numbers steadily fall, which they did through much of the noughties.

We don't need much growth to create more jobs and to reduce our chances of losing them. Yet that's why even small errors in forecasting can give us false optimism and can cause us to make bad decisions. With that in mind, here are some forecasts for 2011:

Roger Bootle of Capital Economics, and adviser to Deloitte

I don't like to pick on professional economist Roger Bootle, but he shows up often in my large database of forecasts, because he turns up a lot in the media to make them.

Ever-bearish Roger Bootle says that the squeeze will get well under way in 2011, with government cuts and household's incomes not stretching as far.

Let's cut to the chase: Bootle reported this month through a Deloitte review that he expects the economy to grow 1.5% this year.

Last year Bootle forecast rising unemployment, but unemployment fell marginally. Yet he also forecast growth to the economy of around 1% and was creditably close: it appears to have been around 1.5%, and that estimate is more likely to be revised downwards as more data comes in.

That was a pretty good forecast for 2010. I have no record of a firm prediction from him for the whole of 2009. However, for 2008 he predicted 2% economic growth and 300,000 more unemployed over two years. The result was seriously worse than he forecast, with growth slightly negative in 2008 and 2.4m people lost jobs over the following 24 months.

That partly demonstrates how wrong you can be if you're just a couple of percentage points out in your growth forecasts.

You can read some of Bootle's property forecasts in House prices: what the forecasters are saying.

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Government forecasts

The Government is more optimistic than Bootle, counting on growth of 2.1% this year. That estimate comes from the Government's new Office for Budget Responsibility (OBR), which is as good as being the Treasury and the Government, because of how its members are selected and the fact the office's assessments are parsed through the governments’ own models on the economy.

It's well known that governments always do inaccurate forecasts. We'll see if this new office can do any better over this year.

What people think

Nationwide measures consumer confidence in the present and for the next six months. This is really about what we think is going to happen to our incomes and how that confidence, or lack of it, affects our buying behaviour. If we expect to keep our jobs and earn more, we're likely to buy more, which boosts the economy and increases jobs.

Currently, our confidence level is 53 points. That probably means nothing to you, but Nationwide used to categorise this as its lowest rating of Stormy. This compares to an average since its records began in 2004 of 81 points, which translates as Unsettled, the third lowest rating.

Nationwide consumer confidence scale

It seems, though, that consumers aren't perfect forecasters either. At the end of 2007 the average view was Fair (88 points). Despite that, within six months we were in a recession. On the other hand, we didn't start losing our jobs for another nine months.

In March 2010 our feeling for that month and the next six months was Gloomy (72 points). This is the second-lowest rating, and yet from this point onwards the number of hours work we've collectively been able to get picked up, and dole numbers sank. The economy grew very satisfactorily for the following six months.

What we learn from unreliable forecasts

Those were just a few examples taken from my large database of forecasters. Due to the obvious difficulty of forecasting, it always makes sense to build up a pot of savings, pay down debt, and to cover your income with appropriate insurances, even when it seems like the economy is ticking along OK, because even a small dip in the economy can lead to job loss, lower pay, or fewer hours work. Try to make financial decisions using factors other than forecasts, as I explain in Now is the time to buy property.

And to finish, the following is a complete list of every single forecaster I've found with a reliable track record...

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