OECD forecasts - Parliamentary Days 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.

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OECD forecasts - Parliamentary Days 2014

  1. 1. International parliamentary seminar OECD forecasts during & after the financial crisis Pier Carlo Padoan 5 February 2014
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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? 11
  12. 12. Explaining the errors Growth weaker than projected in countries with more fiscal consolidation, but only in Europe. 12
  13. 13. Explaining the errors Incorrect assumptions about euro crisis and govt. bond spreads also a source of error at the same time. 13
  14. 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. 14
  15. 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. 15

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