Even during the devastation of the global financial crisis, economists missed the onset of almost all recessions.
The one prediction that corporates and treasury in general would like economists to get right – the imminent onset of a recession – is one they almost always get wrong. This isn’t startling news; research going back to 1972 showed that economists have always gotten it wrong. But the new research looks at 2008-2012, when there were 88 countries in recession. Despite the fact that the global economic crisis and the Eurozone crisis were ravaging countries large and small, economists still failed to forecast the onsets of recessions.
The paper, “‘There will be growth in the spring’: How well do economists predict turning points?'” by IMF analysts Hites Ahir and Prakash Loungani, likens economists to Chauncey Gardner, the dimwitted protagonist of Being There, who rose to great heights by repeatedly intoning “There will be growth in the spring.”
Using data from Consensus Forecasts, which aggregates economic forecasts for countries, the authors found that none of the 62 recession in 2008-2009 were predicted by late the previous year. Worse, they write, “once the full realization of the magnitude and breadth of the Great Recession became known, forecasters did predict by September 2009 that eight countries would be in recession in 2010, which turned out to be the right call in three of these cases. But the recessions in 2011–12 again came largely as a surprise to forecasters.”
Ahir and Loungani say the usual explanation for this dreadful performance – economists don’t update their models often enough – is untrue. Most in the consensus figures update them monthly during a recession, just not downwards enough. They suggest three other theories:
- Forecasters don’t have enough information and their models are inadequate.
- Forecasters don’t have an incentive to call a recession and there may be reputational harm done to those who call a recession and are wrong.
- Forecasters hold on to prior expectations for behavioral reasons.
The authors write, “To paraphrase Oscar Wilde, to fail to forecast a few recessions may be misfortune, to fail to forecast nearly all of them seems like carelessness.” Given their performance, corporates should be very wary of making plans based on economic forecasts