Why Economic Forecasts Often Miss

Why predicting recessions and growth is so hard, how forecasts should be read, and what economists learned after 2008.

In November 2008, during a visit to the London School of Economics, Queen Elizabeth II asked a simple question about the financial crisis: why had nobody seen it coming? Her question captured a common frustration. Economic forecasts often miss, especially at turning points.

Why forecasting is hard

Several features make the economy hard to predict:

Shocks are unpredictable: pandemics, wars, natural disasters and financial panics arrive without warning.
People react to forecasts: if a recession is widely expected, governments and central banks may act to prevent it, changing the outcome.
Data arrives late and gets revised: forecasters often do not know exactly where the economy is today, let alone where it is heading.
The economy changes: relationships that held in the past can break down.

The record on recessions

Studies of professional forecasts, including research by economists at the International Monetary Fund, have found that forecasters rarely predict recessions far in advance. Most recessions are recognised only when they are already under way.

This does not mean forecasts are useless. For normal times, they give a reasonable sense of the likely direction of growth, inflation and unemployment. They are simply much less reliable when something unusual happens.

Reading a forecast properly

A central bank forecasts growth of 2 percent next year. Many central banks, including the Bank of England, publish charts that show a range around this central forecast, sometimes called a fan chart. The range might run from around zero to 4 percent. The most useful message is not the single number but the range, which shows how uncertain the future really is.

Lessons from 2008

After the financial crisis, economists acknowledged that many widely used forecasting models had paid too little attention to the financial system, such as bank leverage and debt. Central banks and researchers have since added more financial detail to their models and put more effort into monitoring risks across the financial system. Some also emphasise humility: presenting forecasts as ranges and scenarios rather than precise numbers.

Judging forecasters by a single miss

Every forecaster will sometimes be wrong. The better test is whether forecasts are accurate on average over many years and whether their stated uncertainty is honest. A forecast that admits wide uncertainty can be more useful than a precise one that turns out wrong.

Key takeaways

Economic forecasts often miss, especially at turning points like recessions.
Unpredictable shocks, reactions to forecasts and late data all make forecasting hard.
Forecasts are most useful when read as ranges rather than single numbers.
After 2008, economists added more financial detail to models and emphasised uncertainty.