MAGGIE PAGANO: Gloomsters eat humble pie as Britain bounces back

There is an awful lot of humble pie being eaten by economic forecasters this week. The first to take a bite was US banking giant Citi, after admitting its forecasts for the UK were far too gloomy last year.

In a mea culpa note to clients, Vasileios Gkionakis, Citi’s currency expert, said his prediction that the British pound would fall to par with the dollar after last year’s mini-budget and that economic demand would collapse, was “wrong, clear and wrong. simple’.

Not only was he wrong, he was dead wrong. Citi also forecast that the consumer price index would rise above 18 percent in the first quarter of 2023 and retail price index inflation would rise to 21 percent. Wrong again.

Sure, inflation is still high at 10 percent, but falling. And the pound is close to a one-year high against the dollar at $1.26.

Even Citi predicts it’s heading for $1.30 next year. What a surprise. Many of us at the time said that Citi’s forecasts were wrong and should be dismissed as far too pessimistic.

Of course, all predictions should be taken with a grain of salt, because they are just predictions. As JK Galbraith joked, “The only function of economic forecasting is to make astrology look decent.”

But the problem is that predictions take on a life of their own. Citi’s forecasts, along with bleak ones from other US banks, were seen as gospel at a time of massive turmoil when everyone feared the bond market carnage during Liz Truss’s short reign would doom the UK.

Remember those fall forecasts from the International Monetary Fund, the Office for Budget Responsibility and the Bank of England itself?

They predicted hellfire and brimstone at the most vulnerable moment, when bond prices collapsed and interest rates skyrocketed.

In fact, the Bank was one of the gloomiest, claiming that inflation would hit 13 percent, predicting the longest recession to last until 2024, and that unemployment would double by 2025.

How wrong can it be? What is more poignant – and more dangerous – is that all this frenzied gloom fueled the narrative that Britain was a basket case.

The disaster hit consumer confidence, made it more difficult for small and large companies to decide whether to invest and deterred foreign investors.

Even then, the real numbers told a different story: although growth was weak, the UK was the fastest growing economy in the G7 last year.

Which is why the bank’s governor, Andrew Bailey, must have choked on an even bigger piece of the pie in his latest economic update yesterday. He had to admit that he and his astrologers had read it all wrong.

He admits that consumer confidence is improving and there will be modest positive growth this year.

The difference between last autumn’s gloom and today, he explains, is that energy prices have fallen sharply and as a result the economy is more resilient than expected.

But that hasn’t stopped the Old Lady from raising rates again, and markets are betting more hikes will follow.

If the Bank does not want to stifle the growth that is there, it must proceed with caution and not repeat the mistakes of recent years.

Born under Aries, Bailey should consult his horoscope. It says don’t make a mountain out of a molehill.

Roll’s bold plans

Rolls-Royce boss Tufan Erginbilgic says the aerospace group is “continuing at the same pace” with its shakeup – profits are up, debt is down and free cash flow is flowing.

Flight hours are almost back to pre-pandemic levels. New orders are coming in, increasing margins while bringing costs under control.

But the big challenge is winning the government contract to build the next generation of small modular reactors (SMRs) to produce nuclear power.

Competition is fierce – Bill Gates’ TerraPower joins GE Hitachi and Mitsubishi in bidding before the fall deadline.

Hopefully Rolls will come up with a brilliant tender so watertight the government can’t refuse.

It’s time to support domestic champions.

Revolutions

Strange state of affairs at Revolut. First it says that the payment app is about to get a banking license.

Then accountants BDO says that it cannot account for part of the turnover. Then boss Nik Storonsky has a shaky attitude, accusing regulators of taking too long and criticizing the UK as a lousy place to do business.

Now financial director Mikko Salovaara has resigned. The usually talkative Storonsky should explain why.