LONDON (SHARECAST) – The financial eggheads in charge at the Bank of England had no idea the UK was about to be engulfed by the biggest recession since the Second World War.
In a refreshingly honest speech to the Royal Statistical Society, the central bank’s deputy governor Charles Bean said that in August 2008 he and fellow policymakers put the chance of the economy contracting over 1.5 percent at a mere “1 in 20”.
“It is somewhat analogous to seismologists trying to predict earthquakes along a fault line,” said Bean. “It is impossible to predict the day and magnitude of a shock with any precision, but it may be possible to say something about the likelihood of an earthquake occurring within a given period from seismic measurements and indicators of latent stress.”
The possibility of contraction as high as six percent – the ONS’s current estimate – would have been considered “virtually negligible”.
But Bean was quick to point out that almost all forecasters “were in the same boat”, and suggested experts may never be able to accurately predict when another financial crisis may hit.
“Downturns associated with financial or banking crises are rather different animals,” Bean said. “One would need to be endowed with perfect foresight to have been able to predict how the financial crisis would unfold.”
Financial data collection must be more flexible if another credit crunch is to be avoided, according to Bean, but he warned: “Almost certainly the seeds of the next financial crisis will sprout in a different corner of the financial system from this one.”