Tuesday, 23 July 2013

Congratulations to the Duke & Duchess of Cambridge...

...our forecasts are unaffected.

Nothing gets investment pulses raising like an exciting new issue and in this case…it’s a boy! Clearly any birth is a wondrous event and a royal one gives joy to the nation. So much so that some economists have been trumpeting the impact which it could have on the UK economy. Estimates vary between £200m and £400m. That even tops my own experience of parenthood, although I made savings by not buying the latest ‘Bugaboo’.

Most of the estimated boost to growth will come from extra familial celebrations (wetting HRH’s head), memorabilia (tea towels et al) and tourism.  Some context is useful here though. In the first quarter of this year household expenditure is estimated to have been £254bn so 600 times the most bullish baby-boom forecast.
Source: Brewin Dolphin/ONS
The tiny impact isn’t the only reason to be dismissive of these predictions, the credibility of the estimate is another. Economists in the Office of National Statistics last month revised down growth for 2012 by 0.1%. That’s a £1.6 billion revision to growth which has already happened and so it is unlikely that an econometric approach can provide any reasonable estimate of such a tiny fraction of growth. Any estimate would be plagued by a lack of data, (not enough royal baby birth samples to draw from in the past) and too much noise (every previous royal birth was accompanied by a host of other more meaningful economic circumstances). This year, for example, if there is a rise in champagne sales, it could be to do with the royal birth, Andy Murray winning Wimbledon or Chris Froome winning the Tour de France.

Economics is useful when investing. We need to know for example if Chinese growth is likely to be accelerating decelerating or reversing.  But we have to recognise that precision is not its strong point. One of the trappings of behavioural finance is overconfidence and to overcome it we have to be able to discern between forecasts and stabs in the dark.

Regular readers will know we think that UK growth prospects are looking a little brighter at the moment, and we certainly believe the royal birth is a very happy occasion, but we should be wary when newspapers trumpet benefits which are based on suspect foundations!

Guy Foster
Head of Portfolio Strategy

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