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The accuracy of economic forecasters put to the test

by James Phillipps on Dec 12, 2011 at 08:37

The accuracy of economic forecasters put to the test

Who would be an economic forecaster? For many, it seems a fast track to ridicule as seen last week when the Office for Budget Responsibility (OBR) was forced to cut its GDP forecast for the second time this year.

The OBR slashed its 2011 forecast from 1.7% to 0.9% in a not unexpected move – but the figure is a far cry from the 2.1% it had forecast in January and then later cut in the March Budget.

So is the Treasury always so far off the mark and is anyone else consistently better at making predictions? The short answer in 2011 is no, not really.

At the start of the year, looking across 22 major investment banks, the average GDP growth forecast was 2%. BNP Paribas and Standard Chartered were the nearest to the mark, both envisaging 1.4% growth, while Citigroup and Credit Suisse were the furthest out, having predicted what now seems an overly bullish 2.5%.

Independent or non-City bodies fared no better, also averaging 2%. Outside the City, the range of forecasts was much wider, ranging from 1.1%, the closest prediction, which was made by the Centre for Economics and Business Research (CEBR), to the wildest at 3.1% by Liverpool Macro Research. The European Commission (EC) had predicted 2.2%, the OECD 1.7% and the IMF 2%.

Going back to 2010, as the UK exited recession in January, predictions were closer although they broadly undershot the 1.7% GDP growth that was eventually seen as economists consistently underestimated the strength of the recovery.

The average City forecast was 1.5%, with independents averaging 1.4%. Far more were a whisker away, however, with Daiwa, Bank of America Merrill Lynch, JP Morgan, Lombard Street and Société Générale all expecting 1.6%, while UBS and Credit Suisse had both predicted 1.8%.

Meanwhile, both the EC and the IMF undershot horribly with their forecasts of 0.9%, while the Treasury came in too low at 1% to 1.5% and the OECD 1.2%. The CEBR also blotted its copy book somewhat by calling 1.2% after being the closest in 2011.

So clearly it is too simplistic to say that commentators consistently overshoot in the good years and undershoot in the bad. The fact that the 2010 forecasts were made in January that year when the UK had just limped out of recession in the previous quarter after posting meagre GDP growth of 0.1% dampened their expectations.

The severity of the financial crisis certainly caught economists on the hop. In January 2009, the IMF predicted the UK’s economy would only shrink by 2.8% that year compared to the 4.9% it actually fell by.

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1 comment so far. Why not have your say?

Adam Murza-Murzicz

Dec 12, 2011 at 16:03

It would seem that : a) economics is not a science but an art; b) the statistics (and we all know that ultimately they lie) on the basis of which any forecasts are made have been "adjusted" and c) wishful thinking plays an enormous part in any economic forecast.

Just as in the case of weather forecasts, economic forecasts are only about 75% accurate and in acute instances are about as accurate as Michael Fish's famous statement in 1986 - i.e. why did no economist raise the issue of overlending in 2005, 2006, 2007, oops.

Ultimately, economic forecasting should come down to common sense - or am I being old fashioned?.

In recent years there have been beacons showing that the market is overheated - e.g Greenspan pointing out the level of indebtedness by the telecoms, which led to the dotcom bust in 2000 OR the fact that mortgage lending in the UK was taking place at 7 times income, whereas previously the norm had been 3.5 times.

This was all there to be seen but the economists did not see it!!

Am I alone in thinking that they, just like accountants, lawyers, HR specialists have screwed business and, perhaps, the WORLD

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