Why economic forecasting is now trickier than before
Bangladesh is facing very difficult – and one might say unpredictable – times that lie ahead in the years to come. I don’t want to raise a red flag or be too alarmist, but who knows what the future holds for a country trying to weather uncertain times and deal with the many dangers that come its way: bad weather, foreign governments non-cooperative, competitive foreign markets, unfavorable trade regimes, cyberattacks, etc.
Bangladesh needs to go through several milestones along its way forward. To name a few, the country aims to graduate from LDC status in 2026, become an upper-middle-income country (UMIC) by 2031, and achieve high-income country status. by 2041. achieved by 2030 as part of the UN Sustainable Development Goals (SDGs).
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As an economist, you frequently ask yourself questions about the future. These issues concern me as well. For example, “When will Bangladesh achieve middle-income country status?” “What will be its GDP growth rate next year?” “Can our RMG exports soon reach the $50 billion target?”
These are legitimate questions and often I scratch my head for the answers. Forecasting future economic growth is the job of an economist and we are trained to do it. We are also aware of the many pitfalls we encounter when trying to project ourselves into the future. The biggest hurdles on the road to accuracy are: 1) uncertainty, 2) lack of data, and 3) limitations of tools or models.
Uncertainty has largely contributed to upsetting the forecasts of economists. GDP growth rates in almost all countries slowed in the last quarter of 2021, and all forecasts turned out to be wrong. Even the US and China are expected to experience slower growth in 2022. US GDP growth will decline from 5% last year to 4% this year, and China’s from 8% to half that figure . Given that China’s economy has been the main engine of global growth in recent years, “the broader economic outlook is starting to darken,” according to the New York Times. But don’t be surprised if we see another revision in mid-2022.
It would be great if we could still predict the future like Jeane Dixon, the well-known American clairvoyant and astrologer who rose to prominence by claiming to look into her crystal ball and predict future events. Dixon was well known for her ability to anticipate major world events, including the death of John F. Kennedy and the Munich Olympics massacre. But she also missed her mark more often than not.
Forecasting the future of GDP, price level, unemployment or other lesser-known economic variables is usually based on econometric models. However, there are different categories and brands of templates, and they vary in complexity and focus. It is well recognized that models can never be expected to provide forecasts with 100% accuracy.
In addition, each model has its own strengths and weaknesses. They often reflect the biases of the economist or institution that creates and operates the model. For example, a conservative think tank that has a strong aversion to tax increases might be expected to show that any increase in corporate tax or personal income tax for the rich will slow economic growth. Similarly, a Liberal organization might predict that spending more government money on social programs will promote healthy growth.
Forecasters also falsify the numbers and often fail to give a full account of any policy action. An example of this tendency to mislead and the disagreement among economists was evident in the divergent estimates of the impact of Trump-era tax cuts on the budget, GDP and debt burden.
The contradictory economic forecasts in this period of current uncertainty obviously raise some concerns. On January 4, 2022, The Wall Street Journal sounded the alarm with a headline-grabbing ad: “Forget trying to forecast 2022” and warned that this year’s economic forecasts could be trickier than usually. A peer-reviewed journal article shows that economic forecasts have made more mistakes in times of uncertainty.
Central banks have generally been very secretive about their decision-making process, especially regarding the assumptions they make in formulating their policy decisions. The US Fed, more forthcoming in this regard, indicated in December that its governing body “did not yet view the new variant as fundamentally changing the path of economic recovery.” In other words, the US Fed did not anticipate the economic slowdown that occurred in late December and January.
Contrary to this optimistic view, cases of Omicron have increased very rapidly even though most countries have imposed relatively few restrictions. A large number of people, sick or afraid of getting sick, stayed at home. Many more are canceling vacation plans or avoiding in-person activities such as dining out. Consumer spending in many countries ended last year on a negative note. And if Covid cases rise again, there is a growing risk that consumers will retain a greater grip on their wallets.
Consider the latest data from the world’s largest economy, the United States. In mid-January, the US Commerce Department reported that retail sales fell 1.9% from November to December. And this decline was widespread. Department store sales fell 7%, electronics and appliances fell 2.9% and non-store retailers, of which Amazon.com was the largest, were hit 8.7%.
Several factors are at play here. Supply chain issues, semiconductor shortages and the dangers of Omicron are still cause for concern. The same goes for shortages of skilled workers and the decline of service industries. Recent forecasts from major banks and research organizations are somewhat at odds with each other. In October, before Omicron showed up, all the pundits were predicting robust GDP growth, a booming Christmas season and rising sales boosted by savings. But now we are witnessing a sudden change, and some of the hidden factors are again affecting all sectors of the economy.
What about the future? The scenarios are based on Omicron’s transmission speed. Some are optimistic that because it hits much of the world at the same time, the nature of its effect on global supply chains could be different from the experience of previous variants, the effects of which are not weren’t as synchronized. But these are possibilities rather than certainties.
The International Monetary Fund will release its World Economic Outlook on January 25, a week later than expected, to take into account the latest Covid-19 developments. Last month, MD Georgieva told the Reuters Next conference that the IMF was likely to revise down its projections for global economic growth in January to reflect the emergence of the Omicron variant of the coronavirus. In October, the IMF forecast global economic growth of 5.9% in 2021 and 4.9% this year, while highlighting the uncertainty posed by new variants of the coronavirus.
The biggest source of uncertainty is obviously the course the pandemic will take. There is a strong feeling among some public health officials that the worst is over and the role of the virus will be endemic, similar to the flu. We have also learned that the Covid virus mutates in countries with unvaccinated masses – we still have multitudes of them in various countries, developed and developing.
“Unfortunately,” says immunologist Ali Ellebedy of Washington University School of Medicine in St. Louis, Missouri, “we still live in uncertainty.”
Dr. Abdullah Shibli is a senior researcher at the US-based International Institute for Sustainable Development (ISDI). Her new memoir, “A Fairy Tale: Autobiographical Stories,” was recently published by Jonantik.