How Reliable are Economic Forecasts?

A good question which a reader may ask is: How reliable are economic forecasts?

As a general rule, - not very accurate at all.

It is said if you want to predict the rate of inflation for next year, the best approach would be to look at what the rate of inflation was in the previous year. This figure is often more reliable than any economic forecasts.

Nevertheless, economic forecasts can be of some use. In the last quarter of 2007, the US economy grew by 4%, yet, most people are predicting a recession. If there is not a recession, there will be at least significantly lower growth than 4%.

The longer the forecast is for, the less reliable it is. There are various factors which can make economic forecasts inaccurate.

1. The unexpected, such as a supply side shock.
2. Irrational Behaviour. It is difficult to know how people will respond to different economic stimulus.
3. It is difficult to know the current economic situation, yet alone predict the future. Economic data take time to prepare and may not be accurate.