The economic forecasters who got it right for 1998

Golden Guru: The Independent's annual award for the most accurate prediction goes to James Walsh of Hermes

JUST OVER a year ago the economy was steaming ahead, thanks to a heady mix of pre-election interest rate cuts, post-election euphoria and the windfall of free building society shares. As forecasters pondered their predictions for the next 12 months at the end of 1997, few could have guessed how much closer to recession the economy would be by the end of 1998.

The winner of The Independent's Golden Guru award for the most accurate economic forecast for 1998, James Walsh of Hermes Pension Management, is relatively optimistic about the next year, however. He said: "The fact that the Monetary Policy Committee has cut interest rates so quickly has boosted confidence. It means companies will not cut back quite as dramatically."

His prediction of 1 per cent growth is in the middle of the range contained in the Treasury's latest monthly summary of forecasts, on which next year's Golden Guru contest will be based. With fourth-quarter gross domestic product figures on Friday showing a small increase, the odds on a soft landing have improved slightly since most of the forecasts were prepared. But they range from minus 0.5 per cent to 2.1 per cent.

This is wider than the range 12 months ago, reflecting the disagreement within the profession about a number of risks. One is the effect of external crises on the UK. Another is whether the Bank of England has indeed acted quickly enough to head off full-blown recession, as Mr Walsh believes.

His success, he reckons, was down to believing in the possibility of the economy combining both healthy growth and low inflation. Certainly, some of the laggards in the table made the mistake of assuming that strong growth would be combined with above-target inflation.

Adam Cole of James Capel, at the bottom of the list, admitted: "My mistake was to be too optimistic about consumer spending. I had expected a residual effect from the share windfall and the slowdown in consumer spending caught us out." He added: "I'm very middle-of-the-road this year."

The Guru league table is compiled by calculating the sum of the absolute error in predictions for the year-on-year increase in GDP, the fourth- quarter inflation rate in the target measure (retail prices less mortgage interest payments) and the claimant unemployment rate.

Some forecasters - among them the Treasury - are excluded for failing to present the exact predictions needed to qualify for entry.

It is a crude measure but gives a good idea of how accurate the forecasters were on the big picture for the economy. Its biggest drawback - especially in a year like 1998 when the results at the top are clustered very closely together - is that small revisions to GDP can alter the exact rankings. However, the award of the title and Golden Guru statue is final.

So close were most forecasts for 1998 that there is really no shame in being anywhere in the top half of the table. But Mr Cole said: "I had better take Monday off work."