How well do economists forecast recessions?

• Author: Prakash Loungani,João Tovar Jalles,Zidong An
• Published date: 01 June 2018
• Date: 01 June 2018
• DOI: http://doi.org/10.1111/infi.12130

DOI: 10.1111/infi.12130

ORIGINAL ARTICLE

How well do economists forecast recessions?

Zidong An

1,2

|

João Tovar Jalles

2

|

Prakash Loungani

3

1

American University, College of Arts

and Sciences, Washington, District of

Columbia

2

International Monetary Fund, Research

Department, Washington, District of

Columbia

3

International Monetary Fund,

Independent Evaluation Office,

Washington, District of Columbia

Correspondence

João Tovar Jalles, International Monetary

Fund, Research Department, 700 19th

Street NW, 20431 Washington DC, USA.

Email: jjalles@imf.org

Abstract

We describe the evolution of forecasts in the run-up to

recessions. The GDP forecasts cover 63 countries for

the years 1992–2014. The main finding is that, while

forecasters are generally aware that recession years will be

different from other years, they miss the magnitude of the

recession by a wide margin until the year is almost over.

Forecasts during non-recession years are revised slowly;

in recession years, the pace of revision picks up but not

sufficientlyto avoid large forecast errors. Oursecond finding

is that forecastsof the private sector and the official sectorare

virtually identical; thus, both are equally good at missing

recessions. Strong booms are also missed, providing

suggestive evidence for Nordhaus' view that behavioural

factors—the reluctanceto absorb either good or bad news—

play a role in the evolution of forecasts.

1

|

INTRODUCTION

Recessions are not rare: economies are in a state of recession 10–12 percent of the time. What is rare is a

recession that is forecast in advance. This is shown in Figure 1, which is based on data for 63 countries

from 1992 to 2014. The bars in the figure show the average forecasts for real GDP growth made in the

year before a recession—the first two bars in the figure—and in the year of the recession, the next two

bars. In April of the year before the recession, the forecasts—both from the private sector (Consensus

Forecasts) and the official sector (IMF)—are for 3 percent growth. While the forecast is marked down

by October, it remains far from signaling a recession. In the year of the recession, forecasters do call for

a recession by April but one that is much milder than what transpires. It is only as the year is ending that

forecasts catch up with reality, shown in the figure by the solid black line.

The International Monetary Fund retains copyright and all other rights in the manuscript of this article as submitted for

publication.

© 2018 John Wiley & Sons Ltd

100

|

wileyonlinelibrary.com/journal/infi International Finance. 2018;21:100–121.

In this paper, we describe the evolution of forecasts during recessions for advanced and emerging

market economies using two sources of forecasts—Consensus Forecasts and the IMF's World Economic

Outlook. Our main finding, as illustrated above, is that while forecasters are generally aware that recession

years will be different from other years, they miss the magnitude of the recession by a wide margin until the

forecast horizon has drawn to a close. We show that forecast revisions during non-recession years are

subject to a considerable amount of rigidity. In recession years, forecasts are revised much more rapidly than

in non-recession years, but not quickly enough to be able to avoid large forecast errors. Our second finding is

that this pattern of behaviour is shared by forecasters from the private sector and the official sector.

Other papers have found comparable results. On the first finding, that recessions are difficult to

forecast, Lewis and Pain (2015) also point to ‘a common failing to predict downturns and to predict

their size’and add that ‘these difficulties have been found across forecasters, across countries and over

longer periods of time (Abreu, 2011; González Cabanillas & Terzi, 2012; Loungani, 2001; Zarnowitz,

1991).’Dovern and Jannsen (2017) also analyse how the systematic growth forecast errors in advanced

economies depend on the business cycle, and document the fact that ‘growth forecasts for recessions

are subject to large negative systematic errors, while forecasts for recoveries are subject to small

positive systematic errors.’

1

On the second finding, Abreu (2011) studies a sample of nine advanced economies over the period

from 1991 to 2009, and finds that ‘the forecasting performance of the international organisations is

broadly similar to that of the surveys of private analysts. By and large, current-year forecasts present

desirable features and clearly outperform year-ahead forecasts for which evidence is more mixed both

in terms of quantitative and qualitative accuracy.’

In the remainder of the paper, we describe the forecast data in Section 2 and the evolution of

forecasts in recession and non-recession years in Section 3. The comparison between official sector and

private sector forecasts is presented in Section 4.

2

|

DATA

The event being forecast is the annual real GDP growth. We refer to the year for which the forecast is

being made as the target year. Forecasts made in the year before the target year are called year-ahead

forecasts and those made during the target year are called current-year forecasts.

FIGURE 1 Evolution of forecasts in the run-up to recessions [Colour figure can be viewed at wileyonlinelibrary.com]

AN ET AL.

|

101