Missed economic growth forecasts put models under scrutiny

The Covid-19 outbreak, Russia’s war in Ukraine, and, most recently, the Middle East turmoil have made it increasingly difficult for specialists to see clearly through their economic crystal balls.

There is a growing demand for improved approaches and strategies to increase the accuracy of economic forecasts and better predict future trends.

Last month, the European Central Bank (ECB) president Christine Lagarde criticised the economists at the World Economic Forum in Davos, Switzerland, saying they don’t go beyond that world because they feel comfortable in that world.

“Many economists are actually a tribal clique,” she said, referring to a lack of openness to other scientific disciplines.

“They quote each other—men more than women, but that’s another story,” the former IMF chief and French finance minister said.

Chief Eurozone economist at ING Bank, Mr Peter Vanden Houte, was also quoted as saying, “The models we currently use are less reliable because there are many factors that are difficult to integrate.” Following a period of sustained low inflation, the reopening of economies after the Covid-19 pandemic sparked a sharp rise in prices.

The situation worsened with the Russia-Ukraine conflict, which intensified price increases and posed challenges to the recession forecasts made by these institutions.

The International Monetary Fund (IMF), for instance, initially forecasted a 2.9 percent growth rate for 2024 in its October 2023 report but was revised to a more optimistic 3.1 percent growth in January 2024.

The Citizen contacted the IMF for comments but was directed to last year’s speech by the agency’s European department director, Mr Alfred Kammer, who highlighted the intricacies of the forecasting process, emphasising the bottom-up approach used in the World Economic Outlook (WEO) publication.

Mr Kammer explained that country-specific factors play a significant role in economic projections, often surpassing the impact of global variables.

He also acknowledged shortcomings in forecasting models, particularly regarding the granularity of data.

The decoupling of gas prices from oil prices amid Russia’s gas supply cuts posed challenges for predicting energy inflation accurately. In response, the IMF has refined its inflation projection framework to include more disaggregated data.

Another critical challenge highlighted by Kammer is the difficulty of gauging non-linearities in economic data, especially amidst constant shocks and fluctuations. Economic models often struggle to capture extreme movements, leading to forecasting errors.

“It is worthwhile also reminding ourselves that macroeconomic data remains difficult to collect, and the key series we rely on—notably GDP—are prone to large revisions.”

“We should focus on avoiding forecast errors that would yield gross policy mistakes rather than worrying excessively over marginal changes in the modal forecast. This also means scenario analysis has a clear role to play—allowing both to implement policies to avoid a downside scenario and do contingency planning on how to react should it materialise,” he said.

The chief executive officer of the Institute of Management and Entrepreneurship Development, Dr Donath Olomi, affirmed that there are challenges in the data and mechanisms used by various institutions in analysing such data. He said that it is important for the relevant countries to have a robust database and system, as economic decisions are evidence-based.

“It is important to have a domestic database so that even if you want to challenge projections, you have evidence to back them up,” he said, adding that a lack of data in some economic elements for developing countries risks accurate projections.

Prof Haruni Mapesa of Mzumbe University’s Department of Economics highlighted the pressing issue of data quality in African countries, emphasising the prevalence of economic activities in the informal sector and the consequent lack of reliable data availability as factors leading to getting it wrong.

He pointed out that many projections, including those by domestic central banks, often resort to averages due to the challenge of obtaining accurate data. “Global projections play a crucial role in informing economic decisions, allowing nations to adjust their domestic policies in alignment with expected trends,” he said.

He said reliable data is necessary for informed decision-making.

A senior lecturer at the University of Dar es Salaam School of Economics, Dr Wilhelm Ngasamiaku, said it is important to understand that projections are assumptions based on different factors and vary from one institution to another. “The margin of error is usually small, even if you compare the same aspect from different institutions,” Dr Ngasamiaku said.

He said the projection variations are influenced by unplanned and unexpected events such as war, disease outbreaks, climate change and its consequences, like drought.

“Even projections by the central bank or in the country’s budget fail due to economic headwinds that may redirect resources elsewhere,” he added.