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.

1. International parliamentary
seminar
OECD 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.
Overview
• 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.
2

3. Properties of the forecast errors
The downturn was not foreseen
%
Forecasts of GDP growth in 2008
3
%
3
2
2
1
1
0
0
-1
-1
-2
Forecasts of GDP growth in 2009
-2
-3
May-07
Nov-07
May-08
-3
Nov-08 Outturn
May-09 May-08
Nov-08
May-09
Nov-09 Outturn
May-10
• Forecasts of (Q4/Q4) OECD GDP growth in 2008 and
2009 were revised down substantially.
3

4. Properties of the forecast errors
The recovery has been mixed
%
Forecasts of GDP growth in 2010
4
%
4
3
3
2
2
1
Forecasts of GDP growth in 2011
1
0
May-09
Nov-09
May-10
0
Nov-10 Outturn May-10
May-11
Nov-10
May-11
Nov-11 Outturn
May-12
• OECD GDP growth (Q4/Q4) rebounded more quickly
than initially expected in 2010.
• But disappointments resumed in 2011 and 2012
4

5. Properties of the forecast errors
Forecast errors were largest in the
vulnerable euro area countries
Average growth forecast error 2007-12
%pt
0.5
0.0
-0.5
-1.0
-1.5
May current year
Nov forecast for following year
-2.0
May forecast for following year
-2.5
OECD
Euro area
core
Euro area Other OECD
vulnerable
Europe
Rest of
OECD
BRIICS
5

6. What factors could be correlated with
recent growth forecast errors?
Explaining forecast errors
• International trade and financial openness.
• Banking sector performance.
• Economy-wide regulations.
• Pre-crisis imbalances.
• Survey information.
• Fiscal consolidation.
• The euro area crisis.
6

7. The downturn was stronger than projected in
more open economies (negative spillovers)
Cumulative growth forecast errors for 2008-09, made in May 2008
Forecast error (%pt)
Forecast error (%pt)
Explaining the errors
0
-4
-8
-12
0
-4
-8
-12
-16
-16
0
100
200
Trade openness
0
50
100
Foreign banks' assets (% total)
• Forecast error = Outturn - Forecast
• This relationship is similar for average errors over the full period
7

8. There were downside surprises in 2010-11 in
countries with lower pre-crisis bank capital
Growth forecast errors for 2010-11, from May 2010
4
Forecast error (%pt)
Explaining the errors
8
0
-4
-8
8
12
16
20
Bank regulatory capital in 2007 (%)
Bank capital is the capital adequacy of deposit-takers, measured as
a ratio of total regulatory capital to risk-weighted assets.
8

9. And also where the financial system
was weakening
Growth forecast errors for 2011-12, from May 2011
0
Forecast error (%pt)
Explaining the errors
4
-4
-8
-12
-5
0
5
10
15
Change in non-performing loans, 2011-12 (%pt)
9

10. Growth forecast errors over 2007-12 were
larger in more regulated economies
RMSEs of November projections for next year
Explaining the errors
3
Group mean by product market
Group mean by labour market
2
1
0
Least regulated
Middle
Most regulated
Degree of regulation for market indicated (2008)
Indicators are the OECD product market regulation index and the OECD
measure of the strictness of employment protection (for regular workers)
10

11. Explaining forecast errors
Forecast errors, fiscal consolidation and
fiscal multipliers
• 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?
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12. Explaining the errors
Growth weaker than projected in countries with
more fiscal consolidation, but only in Europe.
12

13. Explaining the errors
Incorrect assumptions about euro crisis and
govt. bond spreads also a source of error at the
same time.
13

14. Explaining forecast errors
Forecast errors, fiscal consolidation and
fiscal multipliers: OECD evidence
• 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.
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15. Summary
• 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.
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