GDP predictions are reliable only in the short term

A new article from The Economist cites my paper:

“[…] economic forecasters project GDP growth of about 2% in 2020.”

“How much confidence should one have in these predictions? For the past 20 years The Economist has kept a database of projections by banks and consultancies for annual GDP growth. It now contains 100,000 forecasts across 15 rich countries. In general, they fared well over brief time periods, but got worse the further analysts peered into the future—a trend unsurprising in direction but humbling in magnitude. If a recession lurks beyond 2019, economists are unlikely to foresee it this far in advance.”

“The biggest errors occurred ahead of GDP contractions. The average projection 22 months before the end of a downturn year missed by 3.7 points, four times more than in other years. In part, this is because growth figures are “skewed”: economies usually expand slowly and steadily, but sometimes contract sharply. As a result, forecasters seeking to predict the most likely outcome expect growth. However, they adjust too slowly even once bad news arrives, says Prakash Loungani of the IMF. That suggests they are prone to “anchoring”—over-weighting previous expectations—or to “herding” (keeping their predictions near the consensus).”

“If forecasters displayed such biases consistently, an aggregator could beat the crowd by granting more weight to those with good records. But top performers rarely repeat their feats. When it comes to GDP, the best guide is the adage that prediction is difficult—especially about the future.”

Posted by at 8:12 PM

Labels: Forecasting Forum

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