1. OECD FORECASTS
DURING & AFTER THE
FINANCIAL CRISIS
A POST-MORTEM
OECD-BLOOMBERG EVENT
11 February 2014
Pier Carlo Padoan
OECD Deputy Secretary General
Chief Economist

2. The crisis and the recovery have been
exceptional
2

3. Forecasts missed the downturn….
%
Forecasts of GDP growth in 2008
3
%
3
2
2
1
1
0
0
-1
-1
-2
Forecasts of GDP growth in 2009
-2
-3
May-07
Nov-07
May-08
-3
Nov-08 Outturn
May-09 May-08
Nov-08
May-09
Nov-09 Outturn
May-10
Successive forecasts of Q4-on-Q4 OECD GDP growth
3

4. …and accuracy was mixed during the
recovery
4
Successive forecasts of Q4-on-Q4 OECD GDP growth

5. Forecast errors in the crisis were comparable to
the first oil shock in the 1970s
5

6. UK forecast errors are similar to those of other
G7 economies
Error in GDP growth forecast
6

7. Forecast errors were largest in the
vulnerable euro area countries
7

8. What can explain the forecast errors?
Could they have been avoided?
Two approaches:
1. Comparing errors with data available at the time
These data could have helped to reduce our forecast errors
2. Comparing errors with data available now
(not available at the time)
These data help identify the “shocks”
8

9. The downturn was deeper than projected in
more open economies
Cumulative errors in May 2008 forecasts for GDP growth in 2008-09
Forecast error (%pt)
Forecast error (%pt)
0
-4
-8
-12
0
-4
-8
-12
-16
-16
0
100
200
Trade openness
0
50
100
Foreign banks' assets (% total)
9

10. Forecasts were too optimistic for countries
with lower pre-crisis bank capital
Growth forecast errors for 2010-11, from May 2010
8
Forecast error (%pt)
4
0
-4
-8
8
12
16
20
Bank regulatory capital in 2007 (%)
10

11. Growth forecasts were less accurate in
more heavily regulated economies
Indicators are the OECD product market regulation index and the OECD
measure of the strictness of employment protection (for regular workers)
11

12. Were we too optimistic about the negative
impact of fiscal consolidation?
12

13. The intensification of the euro area crisis was a
more important source of growth forecast errors
13

14. OECD New Approaches to Economic Challenges
“By seeking and blundering,
we learn.”
Goethe
14

15. Lesson 1 – get better at spotting downturns
Directional accuracy of May growth projections
OECD countries: 2007-12
Accelerations Decelerations
Number in period
56
116
% correct: projections for same year
86
88
% correct: projections for next year
91
46
G7 countries: 1982-2006
Accelerations Decelerations
Number in period
82
78
% correct: projections for same year
79
83
% correct: projections for next year
74
45
15

16. Lesson 2 – include more information on
the financial system
16

17. Lesson 3 – avoid “groupthink”
Average errors in forecasts from May - G7 countries
%pt
4
From the same year
%pt
4
2
2
0
0
-2
From one year ahead
-2
-4
-6
OECD
IMF
Consensus
EC
2007 2008 2009 2010 2011 2012
-4
-6
2007 2008 2009 2010 2011 2012
17

18. Lesson 4 – better recognise global
linkages and spillovers
Financial openness is the sum of foreign assets and liabilities as a
percentage of double GDP.
18

19. Lesson 5 – think more about risks
• More information about the risks around the
main projections.
• Greater use of quantitative scenario analysis to
illustrate possible outcomes.
• Horizon scanning to plan ahead for unlikely but
potentially costly events.
19

20. Summary
• Forecasting in recent years proved very challenging and
growth has been repeatedly over-estimated.
• We can learn from our errors to focus more on global
linkages, the financial system and risks.
• There are limits to what forecasts can achieve.
Accordingly, as much attention should be paid to the
balance of risks as to point forecasts.
“OECD forecasts during and after the
financial crisis: a post mortem”
OECD Economics Department Policy Notes No. 23
20