Lessons from OECD forecasts during and after the financial crisis

Abstract

This paper assesses the OECD's projections for GDP growth and inflation during the global financial crisis and recovery, focusing on lessons that can be learned. Growth was repeatedly overestimated in the projections, which failed to anticipate the extent of the slowdown and later the weak pace of the recovery. Similar errors were made by many other forecasters. At the same time, inflation was stronger than expected on average. Analysis of the growth errors shows that the OECD projections in the crisis years were larger in countries with more international trade openness and greater presence of foreign banks. In the recovery, there is little evidence that an underestimate of the impact of fiscal consolidation contributed significantly to forecast errors. Instead, the repeated conditioning assumption that the euro area crisis would stabilise or ease played an important role, with growth weaker than projected in European countries where bond spreads were higher than had been assumed. But placing these errors in a historical context illustrates that the errors were not without precedent: similar-sized errors were made in the first oil price shock of the 1970s. In response to the challenges encountered in forecasting in recent years and the lessons learnt, the OECD and other international organisations have sought to improve their forecasting techniques and procedures, to improve their ability to monitor near-term developments and to better account for international linkages and financial market developments.

Education as a Long‐Term Investment: The Decisive Role of Age in the Education‐Growth Relationship

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“…Other papers have found comparable results. On the first finding that recessions are difficult to forecast, Lewis and Pain (2014) also point to "a common failing to predict downturns and to predict their size" and add that "these difficulties have been found across forecasters, across countries and over longer periods of time (Zarnowitz, 1991;Loungani, 2001;Abreu, 2011;González Cabanillas and Terzi, 2012)." Dovern and Jannsen (2017) also analyze how the systematic growth forecast errors in advanced economies depend on the business cycle, and document the fact that "growth forecasts for recessions are subject to large negative systematic errors, while forecasts for recoveries are subject to small positive systematic errors."…”

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“…The focus on frontloaded fiscal and wage adjustments drastically reduced demand and contributed to the deep recession, as lack of product market reforms kept resources in uncompetitive activities instead of creating incentives for moving towards more efficient or new ones. The impact of fiscal multipliers in a deep recession on activity and the rise in sovereign spreads and borrowing costs were also underestimated (Blanchard and Leigh, 2013;Lewis and Pain, 2014;Figure 2). Uncertainty and delays surrounding public debt restructuring further held back investment.…”