How do economists forecast economic growth

Economic forecasts : Why economists are always wrong

Timo Wollmershäuser has an almost impossible job. He is supposed to predict the future for the Germans. He is not a clairvoyant. Wollmershäuser is an economist. More precisely, economic manager at the Munich Ifo Institute. Four times a year, he and his colleagues are looking for an answer to this one question: What is the future of the German economy? The result is a number like this: 1.1 percent. According to calculations by the Ifo Institute, economic growth will be so low this year.

For entrepreneurs and politicians, even lobbyists, this number is important. It helps companies, for example, to estimate how many employees they need. For the economics minister, the number can be a signal to think about an economic stimulus program. Associations, in turn, use the number to emphasize their demands. The number even gives consumers guidance: If the economy grows, they worry less about their job and spend more money.

When economists are wrong

But what happens if Wollmershäuser and his colleagues are wrong with their forecast? What if your prediction doesn't come true? Like last time. They had expected growth of 2.6 percent for 2018 just over a year ago. In fact, it was only 1.5 percent in the end. Like the Ifo Institute, the experts from the other economic research institutes were also wrong, from the DIW in Berlin to the IW in Cologne. They all expected a boom - but in fact the economy barely missed the recession.

The economists are failing now, of all times, when the desire for orientation is particularly great. Brexit, Donald Trump, the new weakness in China: all of this unsettles entrepreneurs and politicians - but also economists. Wollmershäuser says: "We are not prophets."

The job has become more difficult

To understand why the economy is performing differently than researchers predicted, one needs to know how they work. Wollmershäuser explains it like this: “We describe the current state of the German economy and try to derive forecasts for the future from this.” So the economists look at: How high is unemployment? How full are the company's order books? How strong has the economy grown recently? From the picture that emerges, they draw conclusions about future developments.

That sounds easy, but it isn't. “The job of forecasting has become more difficult,” says Ulrich Fritsche. “The political imponderables have increased significantly.” Up until 2005, Fritsche prepared economic forecasts for the DIW - today, at the University of Hamburg, he is researching how accurate the forecasts of other economists are. "How the rate of a currency changes can be predicted with a certain probability on the basis of historical values," he says. "But whether a US president introduces punitive tariffs or what consequences the hard Brexit will have, there is no empirical data from the past."

The consequences of Brexit are difficult to predict

This is why the estimates of what would happen if a hard Brexit actually did occur diverge so widely. In this case, the OECD, for example, is forecasting 3.3 percent less economic growth for Great Britain by 2020, while the British government is forecasting a decline of up to eleven percent. For 2030, the consulting firm PwC predicts a decline of 3.5 percent, while the International Monetary Fund (IMF) is forecasting a minus of eight percent. In other words: nothing is known for certain.

Fritsche is not surprised by this confusion in the Brexit forecasts. After all, one has to make assumptions: What customs duties apply at the border? How bad is the Dover truck congestion? Can EU citizens continue to move to the island to work? How many companies will downsize their UK manufacturing base or relocate to the EU? Depending on how you answer these questions, a different number will come out. So every association and every party chooses the assessment that best fits their line of argument.

The forecast is reliable only six months in advance

In any case, it is difficult to look so far into the future. “You can only predict economic development with some degree of reliability about six months in advance,” says Jörg Döpke, economic researcher at the Merseburg University of Applied Sciences. Together with Fritsche, he recently sent out questionnaires to 200 German economic researchers. They wanted to know how the economists themselves explain their forecast errors. More than 45 percent cited unexpected events such as natural disasters and unexpected political measures as reasons.

For the Ifo forecast, for example, the Wollmershäuser team takes into account what the federal government plans to do according to the coalition agreement. But that does not mean that politicians will implement all of this immediately or that they will not plan something completely different in the meantime. And companies do not always act as expected. In the past year, it was above all the German carmakers who put the economists on the back burner in their forecast. “Who could have guessed that the corporations wouldn't be able to certify their cars according to the new standard in time?” Asks Wollmershäuser. The industry was unable to keep up with the changeover to the new WLTP test procedure in the summer - with the result that the production of individual models had to be temporarily stopped. But because the auto sector is extremely important for the German economy, that has put pressure on growth.

It is unclear how the demand for cars will develop

How to proceed now is to a certain extent a question of faith. The Kiel Institute for the World Economy (IfW) expects that the car manufacturers will do good business again now that the certification is through. Wollmershäuser from the Ifo Institute, on the other hand, suspects that demand for German cars will remain low because the important market of China is weak. This is one of the reasons why their forecasts are different. Instead of the 1.1 percent growth that the Ifo Institute predicts, the Kiel-based company is expecting 1.8 percent.

In the end, things can turn out very differently anyway, given Brexit and Trump. Economists have to live with this uncertainty and the scolding for wrong forecasts. The British economist John Maynard Keynes had no problem with that. He is reported to have said, “When the facts change, I will change my mind. What are you doing, sir? "

Now new: We give you 4 weeks of Tagesspiegel Plus! To home page