The Element of Uncertainty in Economic Forecasting.

An economic forecast which only gives the direction without the exact figures is fairly good for the economist as well as the dependents on forecasts.

Forecasting about events based on past and prevailing situations is a very old practice. In old times, Kings kept forecasters/sages to predict the war, health, weather, state of affairs, future of his sons and daughters based on the position of stars and planets in the sky while common people went to gypsies with crystal balls for the prediction of their future. Most people with a desire to have a vague idea about the future follow Horoscopic predictions based on the twelve zodiac signs in the newspapers. Everyone wanted to be the in-charge of their future for various reasons. A company needs an exact prediction of the future economic situation to run its business effectively and profitably. An investor wanted to know the economic forecast for choosing the stocks of the companies which would be benefited from the economic condition. The business of forecasting has a little downside due to its demand, and in case, which happens many times, events did not turn out to be exactly what was predicted, forecasters could pardon themselves under the cover of unforeseen circumstances and events.

How Economic forecast is used?

All international and national institutions in the business of finance and economic data collection/analysis provide economic forecasts quarterly, bi-annually and annually as a ritual with the help of economists on their permanent or temporary role. Based on these forecast companies across the world plan their strategy and tactics. Governments based on the forecast from these international organizations and their team of economists plan annual expenditure and governance strategy. So its mandatory for the forecast to be correct and accurate, otherwise planning would not give the desired result. But a lot of times the forecasts turn out to be far from exact due to unpredictable events not taken into account.

There is no sense in planning around a forecast that has a high probability of failure due to uncertainty.

The uncertainty plays a significant role in determining the future course. The GDP forecast of 2019-20 (made in April 2019), by the leading institution in the world for global GDP, The US GDP and India’s GDP was around 2.4%, 2.3%, and 7.5 % respectively. It was again revised to the lower numbers in October 2015. But the COVID-19, an unpredictable event, failed all the forecasts. The actual final figures would be very different (less) from the first prediction. Now every forecaster is pardoning themselves by saying that a disease like COVID19 was unexpected in the 21st century which can simultaneously affect (negatively) the economy of many countries.

Example of forecast Change with time due to unpredictable events

 Predicting the spread of disease is indeed beyond the area of expertise of the economist but the economic forecast is not only about forecasting the GDP, trade, export-import, interest rate by looking at the predetermined parameters and variables. It is much more beyond that. While analyzing the economic forecast, the excessive emphasis is given on the figure of GDP growth. The GDP forecast with exact figures hides the dynamism of the future, which makes uncertain events (negative) more harmful.It gives a number around which everything has been planned. If a number supplied by the forecaster is positive (a good forecast) then everything would be planned to achieve that goal and if the number is negative (a bad forecast) then the whole system would try to stop the downturn without considering the impacts on other components because the expert’s opinions cannot be ignored. Systematic errors are largely eliminated by the economist in the forecast but disruption by unpredictable events causes havoc on the economy.

Uncertainty

An economic forecast, especially GDP forecast, which only gives the direction without the exact figures is fairly good for the economist as well as the dependents on forecasts. Let say that an institution predicted that the growth of country ‘A’ by 8% while taking into account the country’s previous performance, the direction of the government, weather prediction, etc. Now country ‘A’ is also become sure because of the forecast that it could grow at 8% and would put up a huge effort to achieve that growth, but suddenly a flood came in the country and caused a great disturbance in the economic activities. Now all the planning that has been done to achieve 8% growth would be of no use because now resource has to be diverted towards relief work for flood-affected areas. It would be better for the nation ‘A’ to prepare for such a catastrophic event than to plan for growth targets. It does not mean it stops planning for the growth but their main focus should be in managing unforeseen events because of their grave impact.

Economic forecasts are important and necessary but while projecting the economic figures the weightage of uncertainty should be increased. Planning for the unpredictable events would save the growth of the country by shielding it from the negative impact of catastrophic events. The annual and long term economic planning by governments must not be focused just around achieving the growth target. It must be done to achieve a greater objective such as improving the health of the particular sector, increase in export, eliminating poverty, better medical facilities or the improvement in the conditions of laborers, which would help the government to subsidize the effect of any event like COVID-19. By allocating more weightage to uncertainty in the calculation of economic forecasts we would be much more equipped and prepared if an event graver than COVID-19 occurs in the future.

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