The key chart
Lesson #3
Given the importance of financial sector balances (lesson #2), it is a surprise that they only occupied two paragraphs and one chart in the OBR’s 217-page, “Economic and fiscal outlook” for the UK (November 2020). A cynic might wonder if this was because the one chart (reproduced above) countered much of the content of the other 216 pages. A more reasoned response might be that the power and application of financial sector balances remains under-appreciated even at these levels, which makes the framework more powerful for those who understand its implications.
In the case of the UK, for example, this approach highlights that official forecasts ask us to believe that UK households, corporates and overseas investors will behave highly unusually and with unprecedented degrees of dynamism in the post-pandemic period. Even then, the assumed result is simply a return to the unsustainable position pre-COVID where combined private and public sector deficits are offset by increasing RoW surpluses.
If we assume that November’s OBR forecasts are now a base case priced into UK assets, then lesson #3 points to downside risks to UK growth, upside risks to the level of borrowing, inflation staying below target and rates remaining lower for longer. More simply, lesson #3 also suggests that official forecasts can/often do fail common sense tests (see also lesson #4).