By some miracle, Britain’s economy is still growing.
According to many forecasts from respected commentators, the country should have all but plunged beneath the waves on June 24th, the instant all of the votes were counted and the Brexit result was in.
But in fact, of all the developed nations, we saw the strongest growth in 2016.
What went right?
Where’s the recession?
The good news for the UK so far is that the recession which was expected to materialise the instant we voted to leave the EU – note that I say “voted”, not actually left – has not, in fact, made an appearance.
British GDP grew by 0.6% in the fourth quarter of 2016, beating expectations for 0.5%.
You can pick at the figures, as you always can with these things. The growth is too dependent on consumption and people borrowing and spending too much (it was ever thus here in Britain). And it’s a preliminary estimate, so it could be revised (lower or higher) next time the figures are checked. And GDP continues to be revised, often significantly, for years into the future in any case.
But the point is, the economy isn’t in a recession right at this moment. In fact, it’s not even slowing down. And that’s a hugely different outcome to that predicted by the vast majority of economists.
Even prior to the Brexit vote, most economists were arguing that some sort of vague “uncertainty” was already hurting the economy. That would only escalate if we actually voted to leave, was the consensus.
In August, following the Brexit vote, the Bank of England had expected the economy to stagnate in the second half of the year. It hasn’t. And to his credit, we’ve already seen a big mea culpa from the Bank’s chief economist Andy Haldane on that score.
Others have been less eager to embrace the criticism – the rationalisations keep coming as to why Britain is still growing.
“Ah but, the Bank of England cut interest rates.” (Surely any economist forecasting a recession would have realised that a central bank – hardly a minor actor in the average economy these days – might consider doing this?)
“Ah but, the pound has fallen.” (Equally, surely no surprise to anyone already forecasting a recession.)
“Ah but, we haven’t left yet.” (Well, yes, but not even the most ardent Brexiteer expected us to literally leave the day after the vote, even if we had declared Article 50 that evening.)
In short, they’re just plain wrong.
Of course, Britain will definitely have a recession in the future. I am 100% confident of that, Brexit or no.
What I’m wondering is how far into the future it would have to be, before it wouldn’t be blamed on Brexit. I suspect there’s no aeon so distant that we wouldn’t hear at least one economist shout: “I told you so!”
How to avoid confirmation bias
Anyway, this isn’t meant to be an economist-bashing piece. I’ve written plenty of them in my time and I’m sure I’ll write plenty more.
It’s more of a reminder that, as an investor, you have to be better than that.
Economists can indulge in this sort of thing because not a single solitary one of them will lose their job because they wrongly forecast an immediate post-Brexit recession. (Do let me know if you know someone who has, by the way – I’m sure it would make an interesting interview.)
But if you’re an investor, you need to tackle this sort of thinking. Because the market doesn’t care that you would have been right, if it hadn’t been for that pesky Mark Carney. The market doesn’t give you points for “ah, but”. It takes your money and gives it to someone else.
None of us likes being wrong. It’s uncomfortable when your view of the world doesn’t chime with what’s happening in reality. So most of the time we try to avoid it.
We indulge in something called “confirmation bias”. We look for evidence that confirms our worldview and disregard the facts that don’t match up. And there are very few people – at any level of seniority – who can take a step back and be dispassionate about it all.
It’s a particularly significant problem at the moment. Many people out there want to believe either the best or the worst about Donald Trump and his presidency – and nothing in between. Same goes for views on Brexit.
Everyone – rightly – complains about “fake news”. But if you look at reporting on these topics, it’s even harder than usual to get anything approaching an approximation of objectivity. I don’t expect objectivity (and I certainly don’t deliver it) when I’m reading an opinion column. But it’s getting ever harder to tell the difference between news and opinion.
How can you resist confirmation bias?
Firstly, read pieces that disagree with your views. Find intelligent commentators with opposing views (rather than rent-a-gobs playing tourist in a subject they have no grasp of). Try to wrap your head around their take. Argue the case out. Find out why they’re wrong – or, horror of horrors – why you’re wrong.
Second, go to the source. Most of the factual data on investment or economics that you read about in a paper or online can be found in the raw. Read company announcements yourself. Read economic data releases yourself. Form your own view before checking out what everyone else’s is.
Or if we’re talking politics (which is clearly on everyone’s mind just now), then view the speeches yourself. Watch them online. It’s in the nature of news reporting to place the emphasis on the most dramatic parts of a story (you have to get people to read it), but that can also be very distorting.
Thirdly, don’t get wedded to a view. This isn’t your football team we’re talking about here. It’s OK to change your mind occasionally. In fact, it’s healthy. Particularly if your profits depend on it.
I’ll have more on the practicalities of all this in future Money Mornings. Meanwhile, we’ve more on how Brexit could pan out in this week’s issue of MoneyWeek, where my colleague Merryn interviews one of the few pro-Brexit economists. Keep an eye out for it – he’s less bullish than you might expect.