Trust your own figures, not forecasters

7 August 2022

There’s an old joke which says that economists have predicted nine of the last five recessions. So perhaps we should regard what they say with caution. 

However, the forecast last week from Bank of England governor Andrew Bailey that Britain could face a recession starting from the end of the year and lasting for five quarters was sobering. 

And so was his view that inflation will reach 13.3 per cent, with households’ real income set to drop 1.5 per cent this year and 2.25 per cent next year, which would be the biggest fall since records began in 1960. 

That would be yet another example of an unprecedented situation we face and, as this blog was set up to follow the tool hire industry through the pandemic and subsequent events, it’s right that it should record this latest development here, too. 

I found two things that the governor said particularly striking. 

First was his assertion that such high inflation could not have been forecast as the main cause was the disruption to energy supplies following Russia’s invasion of Ukraine in February. 

However, inflationary forces began growing well before then. Indeed, this blog has consistently flagged them up! 

In May 2021 a story highlighting the sharp rise in the cost of building materials and equipment due to the rapid post-lockdown bounce-back and supply chain disruptions. Yet the Bank’s view then was that inflation would reach 2.5 per cent (!) by the end of 2021. It revised its forecast to – wait for it – 4 per cent in October. 

Another story a year ago reported how builders and their clients were postponing work because of spiralling material costs and overheads, but the Bank insisted high inflation was only temporary. 

The following month the blog reported how Ryanair’s enfant terrible chief executive Michael O’Leary predicted a rapid take-off (sorry) in air fares during 2022 and soaring demand post-pandemic. How right he has been proved! At the time, the blog wondered whether hirers would be able to increase hire rates to meet similar cost surges. 

And in December construction industry research suggested further supply restrictions and inflationary pressures on materials would last into 2022. 

So despite clear data suggesting otherwise, the Bank has consistently underestimated the inflationary threat which existed many months before the Ukraine conflict and it has been slow in raising interest rates, which are still at historically low levels. Some believe that by acting early and boldly, the need for more serious action would have been reduced. 

Meanwhile, of course, tool hirers and other professionals have just got on with their jobs. And recession is not inevitable. 

The second significant point was when the governor described the inflationary scenario’s implications. He said: “Firms generally report that they expect to increase their selling prices markedly, reflecting the sharp rise in their costs,” and that “businesses at the moment as [the Bank’s] agents tell us feel that they can set prices to recover the increases in costs, and that they are not meeting a lot of resistance on that.” 

Are you able to put your prices or rates up? And if so, are you meeting “resistance” from customers? I’ll follow this up in the next blog post. 

Meanwhile, perhaps you would be best advised to trust your own business figures rather than economic forecasters. 

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