Real purpose of economic forecasting

Real purpose of economic forecasting

Another year of Gregorian calendar has started along with a lot of hopes, expectations, uncertainties and risks. Like the previous years, a number of forecasts and projections have also been made on the prospects of economy, both globally and nationally. This is a global trend no doubt. Economic forecasting is recognised as a process to predict the future condition of the economy using a combination of different indicators. Different research organisations, market analysts and economists do the forecasting or make projection on how economies will do in the near-future. Some forecast on overall macroeconomic trends, some make the projections on different sectors and markets. Many of them also use different forecasting tools by building of statistical models with inputs of many important variables, or indicators like gross domestic product (GDP) growth rate, rate of inflation, interest rates, industrial output, consumer confidence, unemployment rates, trade balances, domestic and foreign investments etc.

Being a recognised exercise, forecasting the economy is widely practised in developed and many developing countries. This is, however, not an easy task and require a lot of effort and adequate data and statistics. The first thing necessary to make a forecast is to understand the present economic situation clearly along with some good knowledge of past trends and developments. It is also important to have some good idea about the economic situations in countries with comparable backgrounds andtrading partners. As countries are connected with one another mostly through trade, knowing the trend of global trade is also critical. One also needs to know the global economic trend as global developments have different impacts on different economies. Thus, forecasting economic situation is a rigorous exercise and needs continuous monitoring of the economy.

As future is usually uncertain and unknown, forecasting the economy is considered by many as an effective way to reduce the risk of future uncertainty. It does not mean that forecasting is perfect and accurate.  In many cases, real developments are far from forecasted ones. Everyone knows that it is impossible to make a cent per cent accurate forecast. No matter how sophisticated are the tools, models and statistics, every forecast is subject to a number of limitations.

Nevertheless, forecasting helps to depict various possible pictures on near-term and long-term economic situations. From these pictures, different stakeholders can get some idea on the possible future developments.  It is necessary for the economic policymakers to get the idea so that they can be prepared to adjust the policies accordingly. This is, however, a tricky job.

In Bangladesh, some economists and analysts unveil their abrupt and brief forecasts mostly in response to the query from the media. By getting all the brief forecasts and partial projections, it is also possible to get a big picture. Only a few organisations present their projections with detail analyses. For instance, Centre for Policy Dialogue (CPD)  unveilits report on the state of the economy under its independent review of Bangladesh development. The first phase of the report is usually released in December or early January where the think-tank mostly review the ongoing economic performance of the current fiscal year and outline risks and challenges in the near future, for the rest of the fiscal year to be precise. As the fiscal year of Bangladesh convers July-June period, any forecast made in December, ahead of the New Year, is mostly concentrated on the last half of the fiscal year. Outlook of the economy in the  near future is also presented by Bangladesh Bank in its annual and quarterly reports. These reports are the only forecast provided by any government agency.

One important feature of the reports is that the forecasts or projections are stated with due caution. Unlike the forecasts made in the reports of International Monetary Fund (IMF) or the World Bank, the local forecast reports are largely indicative and indirect. For example, the summary of Bangladesh Bank Quarterly (July-September, 2021) concluded: "Going forward, the broad-based recovery of economic activities in Q1FY22 is likely to continue in the coming quarters of FY22, with continued expansionary monetary and prudent fiscal policies. However, a sharp rise in global inflation, tightening monetary conditions in global markets, and the threat of Omicron, a new wave of the recent variant of the coronavirus, may feed downside risks in economic activities on both domestic and global fronts in near future." Someone has to go through the full report to decode the forecast properly in his or her own language. The cautious approach has been taken to avoid any misunderstanding or giving any wrong message. As Bangladesh Bank is yet to release its annual report for FY21, it is not known what updated outlook the central bank would come up with.

CPD also in its 'state of the Bangladesh economy in FY22' does not mention anything about the GDP growth rate and inflation rate. Despite providing detail analyses of economic indicators and examining the current inflationary pressure, the CPD mostly focused possible risks and negative impacts and suggested some measures to address the risks. For instance, IRBD concluding note mentioned: "The trends of key macroeconomic correlates during the early months of FY22 evince that many of these are in a recovery trajectory, led by export-oriented sectors. However, macroeconomic stability is not in a comfortable state anymore. Uncertainty is looming large at the global level as well."

Not mentioning the possible growth and inflation rates is a shortcoming of these forecasts although neither Bangladesh Bank nor CPD term these analytical reports as forecast or projection. Only in the final report before the budget, CPD mentions a projected growth rate.  

Policymakers are, however, not comfortable with any negative or critical forecast or projection. This is a barrier to make a comprehensive economic forecast in the country. Policymakers need to keep in mind that forecast is a databased prediction which provides some indications on the future trend and help them to readjust policies occasionally.

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