Liam Dann: How to read an economic forecast

Photo / 123RF

There's been a flurry of new economic forecasts in the past week or so.

And they seem to be upsetting people more than things that haven't actually happened yet should.

It's been overwhelming just trying to keep track of all the new outlooks and numbers.

If the correspondence I've received is any indication, the reassessments being made by the various economic teams are hitting some raw nerves.

They are winding people up for being too gloomy and they're winding people up for being too positive.

It can be overwhelming trying to read economic forecasts. Photo / 123RF

Some people see the more pessimistic forecasts as anti-Government and the more optimistic forecasts as pro-Government.

That's bit unfair because one of the more endearing qualities of good economists - relative to, say, politicians – is that they will change their opinions when the facts change.

Last week I wrote about the stress reaction that extreme uncertainty causes in human brains.

Perhaps that's making reactions stronger than usual.

It may be there are a lot of new economics readers to consider.

The analytics suggest a lot more people read articles about economic forecasts when the economy gets interesting.

Unfortunately, the more interesting the economy is the more difficult it is to forecast.

If there's one thing we can all agree on it's that the economy is very interesting right now.

That doesn't mean we should ignore forecasts.

They need to be read in context but they remain an important guide.

So on that note, here is a guide, to reading them.

Nobody can predict the future

The first thing to consider when you read an economic forecast is that it is not a prediction.

No economist claims to actually know what the future holds.

The events of the past six months have been crazy.

Something big and unprecedented happened, which prompted a big downward revision to all the economic forecasts.

Then things were better than expected, prompting an upward revision to those numbers.

But a lot of those upward revisions didn't actually get done until another bad thing happened, which required a bit of a downward revision.

That's prompted some economists to publish new figures that aren't actually too different to the old figures.

The change in economic circumstances this year is outpacing the collection of the most crucial data.

Also that big unprecedented thing that happened has also created issues with data collection.

So that's created more variables, which means economists have to rely on their judgement to fill gaps.

Which would be fine, except that judgement calls are based on historic patterns ... and the big thing that happened was unprecedented.

Trends are more important than specific numbers

Accurate forecasts are better than inaccurate ones. No economist would argue with that.

But this isn't a sport. There is no final whistle or finish line.

There is certainly a bit of professional rivalry between economists about getting big calls right.

But they are ultimately more interested in trends.

That means an inaccurate forecast isn't necessarily invaluable.

Economists will look at the modelling that was used to make the inaccurate call, try and work out what the issue was and use that to improve the model.

News headlines tend to focus on the big numbers - but a forecast shouldn't be viewed as a static point in time.

Forecasters pick more than one outcome

The other thing that economists do, that might look like cheating if this was a sport, is pick a range of scenarios.

So most economists model a best case, a worst case and a central (or base) case.

That creates leeway for rapid adjustment if any of the variables vary ... which variables are prone to do.

Modelling scenarios is useful because it sets parameters and provides realistic expectations for businesses or consumers to make decisions.

No economist claims to actually know what the future holds. Photo / 123RF

Complaints about economic forecasts usually relate to specific calls - how much house prices were supposed to fall etc.

But it is much less common for events to fall outside the range of scenarios economists have modelled.

Pay attention to multiple forecasts

The good news for those seeking economic foresight is that we have a lot of very good economists for a country our size.

So we get to view a large number of forecasts in aggregate.

This gives us the luxury of seeing where there is consensus and where views fall outside that consensus. Sometimes outliers spot something that others have missed.

Economists are people

There's science to economic forecasting but if you read enough reports for long enough, it starts to become clear that some economists are more optimistic in tone and others pessimistic.

Sometimes that might reflect an ideological view underpinning their work.

But with market economics it's more likely down to personality and culture within the economics team.

Ironically, during much better times, the more pessimistic economics teams were having a stronger run.

Relative to consensus forecasts, economic growth slowed more than many expected through 2018 and 2019.

This year, thus far, the optimists have been in ascendancy.

Did I mention the irony?

In a time when people are craving certainty, its not surprising that we are looking to economics for answers.

I think it can provide a sense of certainty. But not by specifically picking the unemployment or GDP number or house prices.

The certainty comes from the context it provides.

The world will forever be changing on us just when we think we understand it.

But economic forecasts provide a framework and give us insight into the patterns that drive change.