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City Perspective: The Problem with Predictions

We would all like a crystal ball; how easy would that make all our lives? In the City, though, we lesser mortals often rely on the written word of economists and analysts. With deep sector knowledge and understanding of macroeconomics they act as a barometer. During the recent referendum the Remain camp were quick to jump on their warnings of an impending recession should the UK leave Europe. A mere 3 months later, the Brexiters are lauding the apparent U-turn of these ‘sages’ amid fresh data showing the economy performing more robustly than expected.

In January, Credit Suisse stated: “If the UK votes to leave the EU, it is likely to entail an immediate and simultaneous economic and financial shock for the UK” but have since changed their tune by suggesting that the impact of the vote, “seems to be less negative than we expected”.

JP Morgan has said that, “the rebound in August takes out the risk of recession”, despite its chief executive Jamie Dimon saying pre-referendum that “Brexit is a terrible deal for the British economy and jobs”.

Goldman Sachs own chief European economist softened the bank’s stance from predicting a “steep fall in activity” to “the downturn in the UK – while still substantial – is likely to be shallower than we thought”.

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However, can we really berate these institutions for their pre-vote predictions? After all, the scale of what was debated, however badly, and the subsequent vote are an enormous leap into the unknown and we will all be trying to understand the ramifications of the Leave vote for years to come. Our post-Brexit world is undeniably both confusing and not without risk.

Indeed, if one casts an eye across the world, there a number of factors beyond Brexit that could have a negative impact on global economies in the near future; there are fears around the pace of economic global growth slowing, fewer monetary policy opportunities open to world powers, political elections over the next 12 months including America, Germany and France, further geopolitical risks across the Middle East, North Korea and East China and, of course, record low bond yields and concerns around impending rises in interest rates.

The trouble is, when it comes to predictions, economists and analysts have a near on impossible task, but we must continue to listen and engage. They, above most, understand the sectors and the nuances that can steer a balance sheet. They are the ones who are constantly working on complex models to ensure their own point of view is as accurate as possible. They are the ones who effectively make their employers put their money where their mouth is, and that is both brave and commendable.

The months and years ahead for investors and Corporates will be tough to predict: clear and sober communications that demonstrate the robustness of a business model and make it simple to understand will help to determine success or failure. Predictions can sometimes go awry, but I for one would rather have information and opinions available to me than not.

“Prediction is very difficult, especially if it’s about the future.”

Nils Bohr, Nobel laureate in Physics

Rollo is a financial and corporate communications specialist with extensive experience advising public and private clients on complex communications challenges and global business stories. If you would like to discuss your financial communications requirements with him, please email: rollocs@lansons.com

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