Are economic forecasts reliable?

Predictions about economic trends are regularly espoused by economists, bankers and politicians, but what they say and what actually happens are often completely different.

In early 2007, for example, just shy of the worst economic downturn since the Second World War, Germany's top five economists predicted a bright future for the country, with a prolonged period of steady economic growth. Even by the middle of 2008, the Berlin-based German Institute for Economic Research predicted a 2009 growth rate of 1.5 percent for Germany. By August predictions were closer to minus 6 percent.

The current crisis isn't the only major economic development forecasters failed to foresee. In early 2000, most analysts in Germany described economic conditions as more favorable than they had been in years. But instead of experiencing a boom, Germany watched the Internet bubble burst and clog up the gears of the national economy.

"We are often wrong, there is no denying that," said Thomas Straubhaar, an economic researcher at the Hamburg World Economic Institute.

In fact, ask any group of researchers their economic forecasts and one is likely to get a mixed bag of responses, for there is no fool-proof way of knowing exactly what the market will do.

Competitive process

In order to assess economic trends, researchers employ their own highly complex formulas and mathematical equations, and take into account a myriad of variables such as oil prices, consumer confidence, stock prices, and interest rates. The exact details of their predictive strategies are often kept strictly confidential, for being 'right' comes with rewards.

In Germany alone, there are around 50 public and private institutions dedicated to forecasting market developments, and all are vying to be regarded as the most reliable source. But the wide discrepancy in outcomes exposes not only how unpredictable markets can be, but also how a researcher's own theoretical perspective and political bias can affect the process.

The best way to analyze economic predictions, according to Christian Dreger of the German Institute for Economic Research, is to assess the results born of several different research methods. Despite the obvious problems with making concrete predictions about the market, he maintains that such forecasts are valuable tools.

"Economic forecasts are useful because they give some information - at least in normal times - about the future," Dreger said. "Then the degree of uncertainty is reduced and this could improve the planning of private households and firms and they can allocate their resources to a better extent." He also added that economic forecasts help politicians make plans for the national budget.

Now, about six months after the world entered recession, economists are starting to give the thumbs-up sign again as Germany and France, and probably Japan, become the first nations to climb out of the crater left behind by the sub-prime mortgage crisis.

The most predictable part about the recovery so far is that analysts' predictions - ranging from "the post-recession economy will make a quick rebound" to "it will take five years to fully recover" - are all over the place.

Author: Carsten Schabosky/Ute Schyns (vj)
Editor: Sam Edmonds