Accuracy of Economic Projections

The current year is about to end, and economic papers are full of predictions for 2018.

In general, most are pretty good. The world economy is in the midst of a mini-boom, and most economies are growing fast but not too fast. Unemployment is relatively low, and the inflammatory pressures are being held in check. The growth in GDP has accelerated lately, and the latest forecast of the International Monetary Fund for global growth is 3.6% for 2017 and 3.7% in 2018, but forecasts cannot take into account the unknown.

This optimism made me wonder about predictions made just a year ago. Back then the global economy was still recovering from the recession that followed the Sub-Prime crisis and a never-ending debt crisis in Europe. The second largest economy in the world, China, seemed to be slowing, and other economies dependent on exporting seemed extremely vulnerable.

2017 Predictions

The U.S economy was expected to have accelerated growth, and that has certainly happened. Most predictions mentioned that the biggest economy worldwide would grow 2%–2.5%, which was quite similar to the numbers in 2016 (2.1%). It looks as if the U.S economy will, in fact, grow this year at approximately 2.5%, so we are on the high end of the predictions.

Europe is a different story, as most predictions were bearish regarding the old continent economy. The high debts and the Brexit seemed like a barrier to the momentum that was initially seen in 2016. In reality, the European economy did much better in 2017 than anticipated.

China has continued to surprise everyone who anticipated slower growth from a country that can almost be considered a developed country rather than a developing one. China has kept growing in a magical range of 6.5%–7%, and although some have gloomy projections for the Chinese economy in 2018, you have to remember that they have been making such predictions every year.  But China keeps growing…

The stock market was definitely not projected to have the kinds of returns it had in 2017. Some said that “The S&P 500 Won’t Do Much Better Than an Online Savings Account,” while others anticipated very moderate returns or even corrections, but no one predicted the almost 20% gain the market saw this year (and more than 20% in technology stocks).

What may be most surprising is what was said about inflation. Most forecasts talked about positive momentum but thought this would be followed by higher inflation. The Goldilocks Economy we have been experiencing lately is not something you learn about in economics lessons, and, justifiably, most forecasters saw the low unemployment rates leading to higher inflation.

What we can learn from predictions

Overall, the projections were not so bad, but they keep proving that it’s easier to expect that a trend will continue than anticipate a major change. Economists, and most other human beings, are more comfortable projecting (and thinking) that what has been happening will continue in the future. This is very linear thinking that simplifies life, and while it may be correct most of the time, we have to remember that the economy is driven not only by the trends you see but also by the problems you do not see. This is how crises evolve, and even though it is hard to predict what could go wrong, it is much easier to predict that something can go wrong. Predictions for next year may be correct but maybe not. Just take them with a grain of salt.

 

 

 

 

2 comments On Accuracy of Economic Projections

  • How reliable are those GDP growth figures? I have heard many skeptics say the Chinese numbers are fake.

    • I agree about China – I guess we don’t know if and when the economy will collapse. I assume that some of the figures are faked or exaggerated, not only on the government level but mostly on the companies level – the company governance and credibility in China is definitely not by Western standards.
      However, it’s easy to see that the Chinese economy is growing really fast, even if it’s not by 7% a year.

Leave a reply:

Your email address will not be published.

Site Footer

Sliding Sidebar

Never Miss a Post!