Economic forecast is a key input to decision making by government and private sector agents. Economic growth is a crucial factor in determining fiscal sustainability, and the availability of accurate output forecasts can help governments craft policies that promote sustainable growth. Forecasting methods span a wide range, from simple judgmental methods based on expert opinion to sophisticated dynamic stochastic general equilibrium (DSGE) models grounded in modern economic theory.
As the global economy continues to recover from its longest stretch of weakness in over 17 years, policy uncertainties have risen. International discord over trade, financial stability, and climate change has upended many of the policy certainties that helped shrink extreme poverty and expand prosperity since the end of World War II. Despite rising trade barriers, heightened policy uncertainty, and tighter global financial conditions, a return to sustainable, inclusive, and resilient growth remains feasible.
The most common measure of national output is Gross Domestic Product (GDP), the monetary value of all finished goods and services produced within an economy’s borders. GDP is often viewed as the most important gauge of an economy’s overall health, as it includes all activity, including business investment and exports.
When a country experiences a large shock to economic growth, the resulting forecast errors can be quite substantial. In particular, linear time series models are not designed to accommodate such swings in economic activity, and it is important that the methodology used take this into account. Moreover, the use of non-linear models is particularly helpful in reducing error during such periods.
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