oecd forecasts during & after the financial crisis a post-mortem oecd-bloomberg event 11...
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OECD FORECASTS DURING & AFTER THE FINANCIAL CRISISA POST-MORTEM
OECD-BLOOMBERG EVENT11 February 2014
Pier Carlo PadoanOECD Deputy Secretary GeneralChief Economist
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The crisis and the recovery have been exceptional
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Forecasts missed the downturn….
-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
%
Successive forecasts of Q4-on-Q4 OECD GDP growth
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…and accuracy was mixed during the recovery
Successive forecasts of Q4-on-Q4 OECD GDP growth
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Forecast errors in the crisis were comparable to the first oil shock in the 1970s
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UK forecast errors are similar to those of other G7 economies
Error in GDP growth forecast
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Forecast errors were largest in the vulnerable euro area countries
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Two approaches:
1. Comparing errors with data available at the time
These data could have helped to reduce our forecast errors
2. Comparing errors with data available now (not available at the time)
These data help identify the “shocks”
What can explain the forecast errors?Could they have been avoided?
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The downturn was deeper than projected in more open economies
Cumulative errors in May 2008 forecasts for GDP growth in 2008-09
-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
)
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Forecasts were too optimistic for countries with lower pre-crisis bank capital
-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
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Growth forecasts were less accurate in more heavily regulated economies
Indicators are the OECD product market regulation index and the OECD measure of the strictness of employment protection (for regular workers)
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Were we too optimistic about the negative impact of fiscal consolidation?
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The intensification of the euro area crisis was a more important source of growth forecast errors
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“By seeking and blundering,we learn.”
Goethe
OECD New Approaches to Economic Challenges
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OECD countries: 2007-12 Accelerations Decelerations
Number in period 56 116
% correct: projections for same year
86 88
% correct: projections for next year 91 46
Lesson 1 – get better at spotting downturns
Directional accuracy of May growth projections
G7 countries: 1982-2006 Accelerations Decelerations
Number in period 82 78
% correct: projections for same year
79 83
% correct: projections for next year 74 45
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Lesson 2 – include more information on the financial system
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Lesson 3 – avoid “groupthink”
-6
-4
-2
0
2
4
2007 2008 2009 2010 2011 2012
From the same year
OECD IMF
Consensus EC
%pt
Average errors in forecasts from May - G7 countries
-6
-4
-2
0
2
4
2007 2008 2009 2010 2011 2012
From one year ahead%pt
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Lesson 4 – better recognise global linkages and spillovers
Financial openness is the sum of foreign assets and liabilities as a percentage of double GDP.
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• More information about the risks around the main projections.
• Greater use of quantitative scenario analysis to illustrate possible outcomes.
• Horizon scanning to plan ahead for unlikely but potentially costly events.
Lesson 5 – think more about risks
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• Forecasting in recent years proved very challenging
and growth has been repeatedly over-estimated.
• We can learn from our errors to focus more on global
linkages, the financial system and risks.
• There are limits to what forecasts can achieve.
Accordingly, as much attention should be paid to the
balance of risks as to point forecasts.
Summary
“OECD forecasts during and after the financial crisis: a post mortem”
OECD Economics Department Policy Notes No. 23