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Narrative forecasting

Traditional forecasting approaches have failed. We need a new simpler but much more powerful approach.

Traditional approaches to looking at the long-term economic outlook have failed miserably. Complex quantitative models simply don't cut the mustard. What's needed is a new approach which focuses on the most important drivers and the feedbacks and inter-relationships between them. This simply cannot be captured by a quantitative model. In contrast, macronomics argues that the best approach would be to engage in very wide and deep reading on the underlying drivers. This approach emphasises how the story is more important than the numbers, and that instead of solving equations the emphasis should be on solving a jigsaw puzzle by fitting all the various pieces of the future picture together. If you follow this approach the future outlook appears very different to the conventional wisdom. This is narrative forecasting.

The most powerful illustration of the different outcomes you get from a different approach relates to the current economic angst about future potential growth rates across the world's most advanced economies. Over the past decade there has been a progressive flattening in projections of future long-term potential output growth. Potential output growth is estimated on the basis of the contribution from labour supply, tangible and intangible capital and so-called total factor productivity growth (TFP). TFP is assumed to capture the effects of technology but it has been consistently weak since the Great Recession (and in fact had weakened before it) leading to doubts as to the potential productivity gains from the digital economy all around us. But this is a very top-down approach. If you embark on a very different bottom-up approach looking at individual technologies and their potential impact, and then you aggregate all the individual technologies, a very different picture emerges. This explains why we shouldn't have expected an upturn in productivity growth before now - the opposite in fact, a weakening - but should from now on. 

This is a major theme in my forthcoming book, to be published in 2020: The Great Race - for economic supremacy in the 21st century.