1. connecting you to the future Assessing “Britain in 2010” (1991): The Economic Projections and Outcomes PSI Conference on “Back to ‘the future’: Assessing Britain in 2010” Date and time: Wednesday 12 May 2010 from 2pm - 5pm Venue: RSA, 8 John Adam Street, London, WC2N 6EZ Terry Barker Cambridge Econometrics & University of Cambridge 12 May 2010

2. connecting you to the future Background to the projections PSI approached Cambridge Econometrics (CE) to provide long-term projections for the UK economy CE had developed through the 1980s an industrial forecasting service supplying annual projections up to 10 years ahead twice a year for –GDP, and other macroeconomic variables –output and employment by some 40 industries The projections were based on the Multisectoral Dynamic Model (MDM) originally built at the University of Cambridge

3. connecting you to the future How the projections were made The model (MDM) was estimated on time-series data and input-output tables, so that it simulated the annual change in the economy at a sectoral level, with totals being formed from the detail With a set of assumptions about world growth, population, oil supplies and economic policy, the model could solve into the future The model is open in the sense that it allows the balance of payments to remain in deficit and unemployment to persist –The deficit fell in the projections due to faster rate of growth of EU single market –And unemployment gradually reduced to below 1m by 2010

4. connecting you to the future Changes in expenditure components of GDP: projections and observed 1990-2010 based on1970-90 (%) 1985 prices 1990-2010 projection (%) 1985 prices 1990-2010 observed (%) 1985 prices 2005 prices Consumers’ expenditure 764695 (60 ex IT) 55 Government expenditure 394643 55 Fixed investment 5064 58 41 Exports123121117 116 Imports14496149 129 GDP5756 67 47

5. connecting you to the future Assessment of the GDP projections Price basis makes a substantial differences Observed 2010 GDP and components well below trend because of 2009 “Great recession” Consumers’ expenditure and imports affected by IT Fixed investment especially low in 2010 – collapse in housebuilding and commercial building Exports and imports grow much faster than GDP as expected, but imports are well above projection –Slow growth in prices as China has entered world trade –Balance of payments deficits have continued – projections assumed balance by 2000

6. connecting you to the future 1970 1980 1990 2000 2010 1990-2010 projections: Manufacturing 3%pa (observed 0%pa) Private services 4%pa (observed 4%pa)

7. connecting you to the future Issues for long-term economic forecasting Persistence of imbalances – e.g. balance of payments deficits The inherent instability in the global financial system (.com and banking collapses) Effects of changes in relative prices e.g. - manufactures and services

8. connecting you to the future 1970 1980 1990 2000 2010 UK’s chronic deficit 1990 projections

9. connecting you to the future Economic shocks and long-term projections Major shocks 1990-2020: –Collapse in UK property values: 1992 Canary Wharf bankruptcy –Global.com bubble from 1995 and bursting in 2000 –2008 global banking collapse There is always a risk that any particular projection year will be affected by an unforeseen shock Imbalances can build up in the financial system, such as those leading to the 2008 crash, but exact year difficult to predict Lesson: give warning about such risks and an estimate as to whether they are changing and why

10. connecting you to the future Changes in relative prices Some services are labour intensive with fewer opportunities for the substitution of labour by equipment As globalization proceeds, prices of imported manufactures, e.g. from China, have been falling and imports increasing Use of 1985 prices to weight sectoral output in the 1991 projections exaggerated the importance of manufacturing shares Employment share was a more reliable guide

11. connecting you to the future 1970 1980 1990 2000 2010 1990 projections

12. connecting you to the future Conclusions on 1990 projections Long-term projections rely on trends continuing and projection year being “average”, but 2010 is below this trend GDP and components were projected better than 1980s trend Employment structural change from manufacturing towards banking and finance was correct but not strong enough Sectoral projections were distorted by use of 1985 prices