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Economic Forecasts: Hard to Rely On?
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.
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.
Recessions vs. reality
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 challenges might explain why, in the United States, the National Bureau of Economic Research often decides on the official start date of a recession well after the recession has ended.
For the EM-7 economies, the pattern is similar, except that forecasters have been more pessimistic than warranted about the extent of the recovery—the forecasts made in October of the year of the recovery are still quite a bit below the actual outcomes.
Using forecasts correctly