At the turn of the year, people make guesses, promises, and even preparations for the events of the coming year. Yet predictions with certainty are not part of economists’ toolbox. This year will be no different.
Hence, I do not believe that economic forecasts for 2020 will prove fully accurate. I predict, therefore, that the economic forecasts for 2020 are once again hazy. They may be wrong! In assessing the quality of forecasts, I base my views on previous, already proven forecast accuracy.
Since 1996 at JSBE, we have reviewed the accuracy of Finnish economic forecasts in connection with the Summer Seminar of Finnish Economists. Average estimation error in the forecasts has been about 0.5 percentage points, and the annual Best Economic Forecast Award has been given to the one proven to be least wrong. Bigger errors appear at economic turning points and also when the economic growth or downward figures are big. At the moment, the conditions are not right for any major and more rapid economic growth than there was last year.
According to the forecasts, the Finnish economy could grow in 2020 by about 1%. The World Bank forecasts that the global economy will grow by 2.5%.
There are evident risks for brisk development of the global economy. Geopolitical risks cause disturbances that are reflected in increased uncertainty, price changes for raw materials, lagging trade, fluctuation in asset prices, and caution in investments. These risks have a potential effect on economic growth. Finland is an integral part of the global economy and sensitive to its development.
Economic forecasts are a sort of rational guess among prevailing uncertainty. There are just so many likely courses of events that they cannot be foreseen even a year in advance, even though the economic structures would be well known and aptly modelled. Decision-based financial policy makes things even more difficult. Politicians are known for their unpredictability: their promises change during the course of the year or are sometimes forgotten altogether. Furthermore, central banks may interpret their own mandate in a new way. These events cannot be foreseen with any certainty, but uncertainty can be noticed.
We can always guess about the future, and that’s what economists do, as being in the public eye actually calls for it.
Forecasts make their way into today’s news – whether they are accurate or not. They are calling for a point estimate, a single number, when perhaps it would be more honest to give a confidence interval for an economic forecast. The standpoint of cautious common people from Savo – in phrases like “Well, it might grow or it might not, who could tell for sure” – might sometimes be the most honest prediction when making an economic forecast.
Rather than precise point estimates, it would be better to analyse various risk factors that can affect economic growth and be materialised or not. Economists are already able to do this. The seeds of economic crises and crashes are already known and modelled. There is just the problem that these developments are not always certain to become a reality, even though the conditions for these would certainly exist. Risks are growing but they do not necessarily materialise. Some probabilities can be provided, but not certainty. Yet uncertainty doesn’t make for a very good news story.
Usually a good forecast for tomorrow’s weather or economic development equals the current weather or growth figure – or then not. In a book about Winnie-the-Pooh, his donkey friend Eeyore states that although the sun is shining today, it will certainly and anyway rain tomorrow. Economics differs from weather forecasts at least in that if we all believe that tomorrow we will face economic depression, so we will then also make it happen by our own behaviour: a recession is surely coming, whether it is rainy or sunny. So, let’s believe that tomorrow is sunny and that the economy is developing favourably.
The columnist is a professor of economics at the Jyväskylä University School of Business and Economics.
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