Economic forecasting is the butt of jokes, but someone has to do it. You can't make sensible macro policy without some view of how the economy will travel. It's the IMF's thankless job to be the high-profile forecaster for the globe. The Fund's latest World Economic Outlook acknowledges its recent forecasting errors, and offers an explanation.
It's one thing to get the forecast wrong. It's another to be consistently wrong in the same direction. Figure 3.1 from the the 2014 World Economic Outlook shows the story of the past four years.
The Fund says (see Box 1.5 here) that the main problems with its forecasts were 'serial disappointments in emerging markets'. In particular, it identified the BRICs (Brazil, Russia, India, China) as the main issue (where the Fund missed the change in the underlying trend, particularly in China), plus the difficult-to-forecast shocks of the 2010 European periphery crisis and the Japanese tsunami in 2011.
But here's what the forecast record looks like if we compare the first forecast the Fund made (in April of the previous year) with the actual outcome. [fold]
The revisions for the advanced economies are as substantial as the revisions for the emerging economies. What is more relevant for the policy debate, however, is that global growth was sluggish because of weakness in the advanced economies. The emerging economies were growing three times as fast.
Suppose the path of the advanced economies had been foreseen more accurately in 2010. Would the G20-instigated fiscal stimulus have been maintained, instead of being replaced with the firm fiscal austerity reflected in Figure 1.6 (below)? If Europe had foreseen a decline of 0.7% in 2012 followed by a further decline of 0.4% in 2013 rather than the forecast of growth of 1.8% in 2012 and 0.9% in 2013, would policy have remained so passive? Was it so hard to foresee that Europe was headed for stagnation, that Japan was still stuck in the lost decades or that fiscal restraint was keeping the US recovery on an uncharacteristically slow path?
Figure 1.6, World Economic Outlook 2014.
The IMF's successive downward revisions, and the gloomy commentary which accompanies them, might give the impression that global growth is weakening. However the Fund records that this year's global growth is the same as in the previous two years, with an increased forecast for next year. This seemingly contradictory story can be reconciled by saying that the global economy has been chugging along at a steady pace but too slowly for comfort, and the Fund's forecasts have gradually caught up with this reality.
Usually, we can join the mirth that accompanies economists' failed forecasting efforts. This is one example where more accurate forecasting might have improved the policy debate and altered the outcome for the better.
