Economic forecast is a process of predicting the future path of national output. It is a central part of the decision making process by central banks, fiscal authorities, and private sector agents. The range of methodologies to produce these forecasts stretches from judgmental methods that rely on the expertise of individual forecasters to fine-tune forecasts produced by a suite of models, to more sophisticated dynamic stochastic general equilibrium (DSGE) model based forecasts.
In a world where international discord has upended the policy certainties that helped shrink extreme poverty and expand prosperity since the end of World War II, it is more important than ever to have good economic forecasts. But it is also more challenging than ever, with global growth this year expected to be the weakest in 17 years outside of outright recessions.
Despite the recent reduction of tariffs, economic risks remain tilted to the downside: rising trade barriers and elevated policy uncertainty could slow domestic investment and consumption; tighter global financial conditions may raise debt-servicing costs for households and firms; and surges in violence or social unrest may further constrain global growth.
While there is no single “correct” methodology to produce economic forecasts, a key principle is that the method should be based on a statistical characterization of the variable being predicted. For example, a forecaster’s personal theory about why business activity might behave in a certain way determines which indicators to focus on, and can lead to subjective or biased projections. Many rational people therefore regard economic forecasts with healthy doses of skepticism.
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