Economic Forecasts: Hard to Rely On?
| Pages | 42-43 |
Page 42
Forecasts of economic growth can help policymakers and the private sector plan ahead and make decisions. But how accurate are these forecasts? The answer is that forecasters often fall short in predicting a country's growth path, particularly around turning points in economic activity. and now that emerging markets are playing a larger role in driving global growth, forecasting growth has become even more difficult.
The contribution of the Group of Seven (G-7) major industrial economies to global growth has declined-from about 50 percent in 1990 to 20 percent last year. Meanwhile, the seven largest emerging economies (the eM-7) have seen their contribution to global growth rise from 25 percent in 1990 to approaching 50 percent. This development poses a challenge for forecasters, who have much more experience with forecasting G-7 economies.
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Growth in the G-7 economies has been only half as volatile as in the eM-7 economies, and data for the G-7 are more reliable and timely. So how have forecasters fared in tracking growth in the eM-7 economies? evidence from a group of private sector forecasters shows that errors made in forecasting growth in these economies over the past decade have been larger than those for the G-7 economies. This year the task of predicting global growth has been even more perilous as many economies may be at turning points.
Page 43
For the G-7 economies, on average, forecasters had no inkling of recessions a year ahead, although they suspected a slowdown by October. Only in June of the year in which the recession occurred was a decline in economic activity forecast, but it underestimated the eventual decline. as the year was ending, around October, forecasts of recessions caught up with reality.
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Forecasts of recessions in the eM-7 economies show the same pattern as for the G-7 economies. Forecasts made in February of the year of the recession sense trouble, but it is only in June that there is a serious marking- down of forecasts, followed by a catch-up with reality by October.
The task of forecasters is made more difficult because data on growth are prone to revisions. In addition, forecasts are conditional on policies and key prices (for example, oil prices), which can be difficult to predict.
Such...
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