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Are MPs better than the public at forecasting the performance of the UK economy?

The day before the EU Referendum vote the journalist and radio presenter, Julia Hartley-Brewer, implored people to trust themselves rather than politicians and economic experts: “You don’t have to trust them, the so-called experts, or anyone else. You don’t even have to trust me. The only person you have to trust is yourself.” She explained, “Politicians don’t decide how much people buy from or sell to us: customers do.”

Comments like these highlight a growing mistrust in the ability of politicians and experts to anticipate and control the economy. This decline in trust has been well documented by Ipsos MORI and Gallup over decades, but is Hartley-Brewer right to imply that the general population would be better to trust itself over politicians in forecasting the economic performance of the UK?

The answer is no. Comparing the confidence of MPs and consumers in the UK economy and mapping them against the UK’s actual economic performance shows that politicians are better at predicting the performance of the UK economy than the general public.

Overall, MPs’ perception of the economy is far closer to reality than that of the general public. Over the last decade consumers have tended to undervalue UK economic performance. The disparity is clearest after the depths of the financial crisis between late 2009 and mid 2013. The taxpayer bailout of UK banks and quantitative easing revived the economy far more quickly than the public expected. It was only after years of modest but sustained growth, averaging 0.4%, that consumer confidence began to increase, reaching its highest point just after the 2015 general election.

MPs’ attitudes towards the strength of the UK economy run broadly parallel to those of consumers.  What differentiates MPs’ predictions is that they are more positive about the nation’s prospects than the public. Where consumers remained negative after the state bailed out the banks, politician’s confidence bounced back to near previous levels. The only period that MPs overestimated the UK’s economic performance was in the years prior to the 2015 general election. In January 2017, 60% of MPs thought the economy would fare well over the next 12 months, a level of confidence similar to before the recession.

The comparison reveals that MPs’ confidence in the economy is a better signal of economic performance than that of consumers. Consumers tend to be overly pessimistic and slow to react to wider economic changes whereas MPs tend to be more sensitive, but perhaps overconfident around election time.

As we approach Brexit negotiations, the economic confidence of both MPs and consumers is falling, but MPs tend to be more positive toward the country’s economic prospects than the wider population.

Which group should we trust? The evidence over the last decade shows that MPs’ forecasts have been closer to actual economic performance than those of the people, but caveat emptor – as every financial product constantly reminds us, ‘past performance is not a guide to future performance’.

Footnote:

GfKs Consumer Confidence Barometer is an index combining four types of question about the public’s economic circumstances, one of which is about predicting the performance of the UK economy.

Populus interviewed 100+ MPs, asking them, ‘How do you think the British economy will fare over the next year for the country as a whole?’

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