Some 25 years ago, when I was in charge of forecasting at the Organisation for Economic Cooperation and Development (OECD) in Paris, a colleague and I conducted a detailed postmortem on the accuracy of economic forecasts. We wanted to understand why forecasters had got things so badly wrong after the great 1973-74 oil shock.
Our conclusion was that in most years economic forecasting is quite accurate—actual GDP growth generally comes out to within plus or minus one percentage point of estimates prepared a year ahead. However, forecasters get thrown when two conditions are present simultaneously: when economies are subjected to a shock that is large—which we took to be a shock of 1 per cent or more of GDP; and when that shock is novel—meaning that it involves transmission mechanisms that have not been observed before.
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