Governments, investors and businesses spend a lot of time and money working on economic forecasts – but just how often do the economists making the predictions really hit the target?
Most just brush their mistakes under the carpet and carry on hoping no one will notice their errors.
But the Organisation of Economic Co-operation and Development (OECD) has looked back at forecasts made by their economists and other organisations, like the International Monetary Fund, the World Bank and European Commission.
The view is if highly-paid thought influencers at these leading global institutions don’t get their sums right, how can anyone else and how can anyone make valid financial decisions based on their figures?
To find out, the OECD has looked at piles of predictions made between 2007 and 2012 to test the forecasts against what actually happened.
The overarching view was OECD economists erred on the side of optimism, understating the scale of economic collapse in the recession of 2008-2009 and overstating the progress of the recovery.
Ups and downs
Analysts reviewing the predictions also realised they tended to get things woefully wrong for certain regions, expecting a much quicker resolution of the Eurozone crises and failing to see how national economies had become vulnerable to developments beyond their borders over which they had no control.
“This review may sound like navel-gazing, but the point is we have learned a lot from the crisis,” OECD Chief Economist Pier Carlo Padoan. “The experience gained over the past few years is helping to change how the organisation works and thinks.”
One lesson is the OECD is better at anticipating upturns than downturn, he explained.
OECD economists were right about only 46% of downturns, but 91% of improving economies over the five years that the review covered.
Another is looking deeper into the links between an economy and the underlying financial system as the Eurozone sovereign debt crisis ‘took the OECD by surprise”.
The review also highlighted how prophets of prosperity or doom gathered together.
“Group thinking is a factor we must take into account with economic forecasts,” said Padoan. “Institutions tend to discourage members taking opposite views – the IMF recognised that institutional culture influenced their thought during the recession.”
The review is also leading to economic predictions covered by wealth warnings – saying what economists believe might happen, but with a reminder they are not always right and giving reasons for why their prediction may not come to pass.