The Growth Forecast Puzzle

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• Authors: M AYHAN KOSE, FRANZISKA OHNSORGE, NAOTAKA SUGAWARA
• Published: March 1, 2019

Debate over technological change and long-term growth

• Two contrasting views on the implications of recent technological innovations:
  • Optimistic: new technologies (machine learning, cloud computing, robotics, smartphones) will drive a surge in productivity and economic growth (Brynjolfsson and McAfee 2014; Mokyr 2018).
  • Pessimistic: new technologies may have diminishing marginal impacts on productivity and structural factors (aging, sluggish investment) could stall or reduce future growth (Gordon 2016).
• Credible quantitative analysis of the aggregate impact of new technologies on growth prospects is described as difficult, if not impossible.
• Long-term growth forecasts are used as a partial window into this debate.

Data and methodology

• Source of forecasts: Consensus Economics—surveys professional forecasters several times a year to produce long-term annual growth projections (the average forecast for 6–10 years ahead).
• Sample: long-term forecasts over 1998–2018 for 20 advanced economies and 18 emerging market and developing economies that constitute roughly 90 percent of global GDP.
• Rationale: Consensus forecasts reflect perspectives of many institutions and a wide range of methodologies.

Key findings on long-term forecasts (1998–2018)

• Global long-term forecast changes:
  • In 2010, the global economy was projected to grow at 3.3 percent in 2020.
  • By 2018, the long-term growth forecast had been reduced to 2.5 percent.
• Average downgrades:
  • Long-term forecasts were downgraded for all countries by an average 1.4 percentage points between 2007 and 2018.
• Historical pattern:
  • Between 1998 and 2007, the average long-term forecast rose from 3 percent to 3.4 percent.
  • Since the 2008–09 crisis, long-term forecasts have materially deteriorated for both advanced and emerging market and developing economies.
• Country examples:
  • United States: in 1998, US growth was expected to be about 2.4 percent in 2008; by 2008, the long-term growth forecast had been revised upward by 0.3 percentage point.
  • China: in 1998, expected growth was 7.5 percent over the following decade; by 2008, the long-term forecast had been raised 0.2 percentage point.
  • Brazil and India: long-term growth forecasts were upgraded in 2008 relative to 1998 but by 2018 had declined 0.3–2.4 percentage points below 1998 levels.
• Forecast accuracy and bias:
  • Long-term global growth forecasts made a decade earlier exceeded actual outcomes in every year of the 2008–18 period except 2010.
  • On average, long-range forecasts overshot actual growth by 1.2 percentage points.
  • Three-year-ahead forecasts overestimated growth by 0.7 percentage point over the period until 2018.
  • The optimism bias in forecasts tends to increase as the time horizon gets longer.

Drivers of forecast revisions and potential growth

• Cyclical and structural forces behind revisions:
  • Postcrisis downgrades coincided with the 2008–09 global recession, an anemic recovery (especially in advanced economies), the 2011–12 euro area debt crisis, and a sharp slowdown in emerging market and developing economies (partly due to a downturn in commodity prices).
  • Structural forces: demographic changes, investment prospects, and productivity trends have been eroding global potential growth.
  • During 2013–17, global potential growth was roughly 1 percentage point lower than a decade earlier due to weak productivity growth, sluggish expansion of investment, and a broadening slowdown in working-age-population growth.
• Relationship between realized output and forecast revisions:
  • Long-term forecasts tend to improve during periods of sustained strong output growth (productivity, employment, investment growth).
• Forecasts versus potential growth:
  • Long-term forecasts for global growth often exceed estimates of global potential growth over the following decade, indicating persistent optimism relative to potential estimates.

Explanations for increasing pessimism despite rapid technological change

• Information and measurement issues:
  • Forecasters may benchmark against recent low measured productivity growth, which may be underestimated because of measurement error (Solow: “You can see the computer age everywhere but in the productivity statistics”).
  • Forecasters may be unable to project the impact of major technological changes because such changes are rare and their aggregate impacts are felt only gradually; better econometric tools and data are required.
  • These two explanations attribute much of the decline to a lack of good information.
• Structural headwinds:
  • Adverse demographic trends, slowing investment growth, and stagnating productivity from existing widely used technologies could reduce growth prospects so much that even large productivity gains from new technologies cannot deliver strong long-term growth.
  • New technologies may not yet be mature for widespread general business use; diffusion may require long and uncertain lags.
  • Obstacles to firms’ adoption of new technologies include financing constraints and limited worker skills.

Implications and policy recommendations

• Forecasts remain optimistic relative to eventual outcomes, but recent long-term forecasts show increased pessimism—consistent with technology pessimists’ views about the near-decade.
• Policy imperative: act now to enhance potential growth rather than wait for technological benefits to materialize.
• Recommended initiatives to accelerate realization of new technologies’ growth benefits:
  • Raising investment in human capital.
  • Expanding infrastructure investment to facilitate the use of new technologies.
  • Improving institutions and regulations to meet the needs of technological change.
• Strategic approach: prepare for adverse outcomes while planning to realize technological opportunities (in the spirit of Dwight D. Eisenhower’s dictum “Plans are worthless, but planning is everything”).

The Growth Forecast Puzzle — F&D Magazine, March 2019. M. Ayhan Kose, Franziska Ohnsorge, Naotaka Sugawara.

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