The practice of economic forecasting has, in recent weeks, become a race to the bottom. The increasingly grim readings of the tea leaves for global growth are understandable as restrictions related to the coronavirus pandemic put a sudden stop on mobility and commercial activity, while hundreds of millions find themselves out of work and the existence of tens of thousands of businesses comes under threat.
Last week, the International Monetary Fund downgraded its global outlook compared to two months ago, saying it now expects GDP will shrink by 4.9 per cent this year. According to the Organisation for Economic Co-operation and Development, world output is forecast to plummet 7.6 per cent this year in the absence of a Covid-19 vaccine. Even with a vaccine, the OECD expects it to fall by 6 per cent. The World Bank projects a contraction of 5.2 per cent in 2020, a sharp downward revision from January. And Bloomberg analysts say output will shrink 4.7 per cent in the best case. In Bloomberg's more pessimistic view, global GDP contracts 6.7 per cent.
The consensus is dire.
Historically, however, even without the wild card of a pandemic, economic forecasts have a mixed track record. According to a Bloomberg analysis of more than 3,200 forecasts published each spring since 1999 by the IMF, only in 6 per cent of cases were they accurate. The IMF was shown to have been in almost equal measures too optimistic and pessimistic at other times.
Oxford University’s Professor David Hendry, a leading specialist in the field of economic forecasting, wrote in 2017 that “the repeated inaccuracy of economic forecasts has led to that activity becoming the butt of many jokes, as well as questions by [Britain’s] Queen Elizabeth as to why no-one foresaw the" the last financial crisis.
“The usual assumption in macroeconomic analyses is that the outcome expected today for tomorrow will be accurate, as indeed it would be if shifts did not happen. But they do,” he wrote.
That is not to undermine how bad the situation is as described by the IMF, World Bank and other global bodies. It is rather to point out that economic forecasting is at the best of times of limited usefulness when planning for the future. There are currently even more significant challenges facing anyone trying to accurately project what is going to happen. Policy is changing week-to-week, data has never been more unreliable and dependent on localities, and economists now must also factor in the science at work behind the response to the public health crisis.
It is near impossible to track such a fast-moving target. Added to that is the impact of actions already being taken to mitigate the economic pain.
The IMF itself has been deploying about $100 billion in emergency funding to 72 countries during the pandemic. Governments across the world have stepped into the fray with pledges to carry out historic levels of spending, too. We do not yet know how this will alter the landscape.
Also, when every major institution is in agreement on what the outlook will be, my natural reaction is to wonder if there may be some psychology at work given the extreme levels of uncertainty in play.
It worries me, too, when there are no respected voices out there offering a contrarian view. It tells me that there is too much fear in the air for any analyses to be wholly relied upon. The safest option for any analyst right now worried about their credibility, when there are so many gaps in our knowledge and too many questions remain about the virus, is to not be an outlier.
This is true both in terms of the downside and upside. While collectively there is an expectation of a significant rebound in growth next year, despite the risk of second waves of the virus hitting, the emotional and mental impact of the crisis means that forecasting more than a few weeks ahead will likely be clouded by the prevailing sentiment on the ground.
The IMF's own chief economist Gita Gopinath said last week that the situation is very fluid. "You could have better news and treatments and vaccines and improvement could be even faster. But it could also be worse if indeed the virus cannot be contained and you have second waves," she pointed out.
Given all of the above, during this crisis in particular, we have nothing to lose from ignoring the latest batch of economic forecasts and everything to gain. Better still, let us suspend them until 2021 at the earliest. Why is there any need to churn them out so frequently?
Their main purpose – to inform policy makers – cannot be realistically fulfilled when we all know that in a few months' time the forecasts will change again.
To keep producing them in the current atmosphere is unhelpful and only creates alarmist headlines, heaping unnecessary pressure on governments already grappling with the tension between the health and economic responses to the crisis.
Mustafa Alrawi is an assistant editor-in-chief at The National