The Monetary Policy Committee’s growth forecast for 2012: Misplaced Optimism?

As to be expected following some positive months in the United Kingdom, the latest growth forecasts from the Monetary Policy Committee appear to be moving in the right direction, that is, upwards. Data collected since the beginning of 2012 indicates better-than expected economic performance in the UK and the Bank of England’s economists, ever the optimists, have regarded these signs of recovery as sufficient grounds to increase the 2012 growth estimate to 1.95%, from 1.21% in November.

The European Commission, however, has today published growth estimates for the EU and Euro area, and its forecast for the UK, last recorded in November, remains at 0.6%. As such, the disparity between the two forecasts has widened significantly, with the Commission’s forecast far more in line with the UK Office for Budget Responsibility’s forecast of 0.7%. While the Commission did state that there has been significant improvement in key economic indicators and that UK consumption would likely be boosted by the falling inflation rate, its outlook on growth and other variables such as unemployment remained much the same as in November. This is largely due to its expectation that British exports will be hit by a Euro-wide “mild recession”. While the Commission referred to it as “mild”, the severity of the purportedly-forthcoming recession is evident, given that 24 of the EU27 saw a reduction in growth forecasts while many Euro area countries such as Italy and Spain may also see a fall in output.

Given that private-sector and IMF forecasts for UK growth remain at 0.4% and 0.6% respectively, it seems the Bank of England is excessively optimistic – understandable given the fluctuating confidence in the economy. Only time will tell which forecast will prove more accurate. As with all economic models, measures and forecasts, the only certainty is uncertainty.