OECD forecasts - Parliamentary Days 2014
15
International parliamentary seminar OECD forecasts during & after the financial crisis Pier Carlo Padoan 5 February 2014
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Findings of a recent OECD paper on its forecast performance over the period 2007-12, focusing on the lessons that can be learned from cross-country differences in growth forecast errors and the changes to forecasting models and procedures that have been prompted by the experience of the crisis. By Pier Carlo Padoan, Deputy Secretary-General and Chief Economist.
Transcript of OECD forecasts - Parliamentary Days 2014
International parliamentary seminarOECD forecasts during & after the financial crisis
Pier Carlo Padoan
5 February 2014
2
Motivation and context
• NAEC: reviewing the crisis and identifying lessons for future forecasting performance.
• Regular forecast post-mortems by ECO.
• Three aspects of the project:
– Quantitative evaluation of the forecasts.
– What structural, financial and policy-related factors are related to the errors?
– Interviews on post-crisis changes with experts from other international organisations.
Ove
rvie
w
3
The downturn was not foreseen
• Forecasts of (Q4/Q4) OECD GDP growth in 2008 and 2009 were revised down substantially.
Pro
pert
ies
of
the f
ore
cast
err
ors
-3
-2
-1
0
1
2
3
May-07 Nov-07 May-08 Nov-08 May-09
Forecasts of GDP growth in 2008
Outturn
%
-3
-2
-1
0
1
2
3
May-08 Nov-08 May-09 Nov-09 May-10
Forecasts of GDP growth in 2009
Outturn
%
4
The recovery has been mixed
• OECD GDP growth (Q4/Q4) rebounded more quickly than initially expected in 2010.
• But disappointments resumed in 2011 and 2012Pro
pert
ies
of
the f
ore
cast
err
ors
0
1
2
3
4
May-09 Nov-09 May-10 Nov-10 May-11
Forecasts of GDP growth in 2010
Outturn
%
0
1
2
3
4
May-10 Nov-10 May-11 Nov-11 May-12
Forecasts of GDP growth in 2011
Outturn
%
5
Pro
pert
ies
of
the f
ore
cast
err
ors
Forecast errors were largest in the vulnerable euro area countries
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
OECD Euro areacore
Euro areavulnerable
Other OECDEurope
Rest ofOECD
BRIICS
Average growth forecast error 2007-12
May current year
Nov forecast for following year
May forecast for following year
%pt
6
• International trade and financial openness.
• Banking sector performance.
• Economy-wide regulations.
• Pre-crisis imbalances.
• Survey information.
• Fiscal consolidation.
• The euro area crisis.
What factors could be correlated with recent growth forecast errors?
Exp
lain
ing
fore
cast
err
ors
7
• Forecast error = Outturn - Forecast• This relationship is similar for average errors over the full period
The downturn was stronger than projected in more open economies (negative spillovers)
Cumulative growth forecast errors for 2008-09, made in May 2008
Exp
lain
ing
th
e e
rrors
-16
-12
-8
-4
0
0 50 100Foreign banks' assets (% total)
For
ecas
t er
ror
(%pt
)
-16
-12
-8
-4
0
0 100 200Trade openness
For
ecas
t er
ror
(%pt
)
8
There were downside surprises in 2010-11 in countries with lower pre-crisis bank capital
Exp
lain
ing
th
e e
rrors
Bank capital is the capital adequacy of deposit-takers, measured as a ratio of total regulatory capital to risk-weighted assets.
-8
-4
0
4
8
8 12 16 20
Bank regulatory capital in 2007 (%)
Fo
reca
st e
rro
r (%
pt)
Growth forecast errors for 2010-11, from May 2010
9
And also where the financial system was weakening
Exp
lain
ing
th
e e
rrors
-12
-8
-4
0
4
-5 0 5 10 15
Change in non-performing loans, 2011-12 (%pt)
Fo
reca
st e
rro
r (%
pt)
Growth forecast errors for 2011-12, from May 2011
10
Growth forecast errors over 2007-12 were larger in more regulated economies
Exp
lain
ing
th
e e
rrors
Indicators are the OECD product market regulation index and the OECD measure of the strictness of employment protection (for regular workers)
0
1
2
3
Least regulated Middle Most regulated
Group mean by product marketGroup mean by labour market
Degree of regulation for market indicated (2008)
RMSEs of November projections for next year
11
• IMF: fiscal multipliers under-estimated in recovery:– growth weaker than expected in countries with
stronger projected fiscal consolidation.
• Alternatively, actual consolidation could have been stronger than projected consolidation.
• Growth disappointments also coincided with the euro area crisis.
• What does the OECD evidence say?
Forecast errors, fiscal consolidation and fiscal multipliers
Exp
lain
ing
fore
cast
err
ors
12
Exp
lain
ing
th
e e
rrors
Growth weaker than projected in countries with more fiscal consolidation, but only in Europe.
13
Exp
lain
ing
th
e e
rrors
Incorrect assumptions about euro crisis and govt. bond spreads also a source of error at the same time.
14
• Yes, growth disappointments in countries with stronger projected consolidation.
• Yes, growth disappointments in countries with stronger consolidation than projected.
• But only in Europe, and only if Greece is included.
• The bond spread errors are a more important source of growth forecast errors – confirmed by econometric evidence.
Forecast errors, fiscal consolidation and fiscal multipliers: OECD evidence
Exp
lain
ing
fore
cast
err
ors
15
• Forecasting in recent years proved very challenging and
growth has been repeatedly over-estimated.
• Global interconnectedness, structural policy settings and the
health of the banking sector are all related to forecast errors.
• Errors in assumptions about the speed at which the euro
crisis would ease have been an important source of growth
forecast errors.
• Important changes are now taking place to forecasting
practices and procedures.
Summary
