Why Economists Can’t Predict

How do we know that economists have a sense of humour? They put a decimal point in their forecasts.

The joke really shouldn’t be amusing at all. Governments, corporations and even individuals place great weight on the outlook for the future. From education to infrastructure to pensions, they all rely to some extent on an outlook.

The truth of the matter though is that economists have an abysmally poor prediction record. Before explaining why lets have a quick look at how abysmal.

The Economist magazine have a database of projections by banks and consultancies for annual GDP growth. It stretches back 20 years and now contains 100,000 forecasts across 15 rich countries.

Unsurprisingly they found that forecasts tend to fare well over brief time periods, but got worse the further analysts peered into the future. If a recession lurks beyond 2019, economists are unlikely to foresee it this far in advance.

Projections made in early September for the year ending four months later missed the actual figure by an average of just 0.4 percentage points. Errors rose to 0.8 points when predicting one year out. But over longer horizons forecasts performed far worse. With 22 months of lead time, they misfired by 1.3 points on average — no better than repeating the previous year’s growth rate.