How Well Are Recessions and Recoveries Forecast? Prakash Loungani, Herman Stekler and Natalia Tamirisa

Transcription

1 How Well Are Recessions and Recoveries Forecast? Prakash Loungani, Herman Stekler and Natalia Tamirisa 1

2 Outline Focus of the study Data Dispersion and forecast errors during turning points Testing efficiency of forecasts Conclusions 2

3 Forecasting turning points of business cycles is a daunting task Most recessions remain undetected until they are well underway Less is known about forecasting recoveries, esp. in emerging economies Forecast performance during crises also has not been explored Can dispersion of forecasts be a leading indicator of turning points? 3

4 Predicting growth in 2008 The United States The United Kingdom GDP Forecast GDP Forecast 3.0 Actual GDP 2.5 Actual GDP Jan [-1] Apr [-1] Jul [-1] Oct [-1] Jan. Apr Jul Oct 0.0 Jan [-1] Apr [-1] Jul [-1] Oct [-1] Jan. Apr Jul Oct Germany China GDP Forecast GDP Forecast 2.5 Actual GDP 10.5 Actual GDP Jan [-1] Apr [-1] Jul [-1] Oct [-1] Jan. Apr Jul Oct 8.0 Jan [-1] Apr [-1] Jul [-1] Oct [-1] Jan. Apr Jul Oct 4

5 Literature on Consensus Forecasts Predictive failure for U.S. recessions Zarnowitz (1986), Fintzen and Stekler (1999) Scarce literature on forecast performance for other countries Similar predictive failure (Öller( and Barot, 2000) Inefficiency of forecasts (Loungani, 2001) Nascent literature on dispersion of consensus forecasts For G7, dispersion increases during periods of uncertainty (Dovern, Fritzsche and Slacalek, 2009) 5

6 This study focuses on forecast performance in a broad range of countries during crises Describe performance of private sector forecasts for real GDP growth in a broad range of countries Examine track record for forecasting recoveries and how it varied depending on the shape of recovery Compare forecast errors for recoveries after banking, currency and debt crises Test efficiency and bias of forecasts during recession, recovery and crisis episodes Examine dynamics of forecast dispersion and role as a leading indicator 6

7 The dataset is a complex panel Monthly forecasts of output growth for the current and next year 24 forecast observations for each year Consensus Economics,, Inc October 1989 to December advanced and 56 emerging and developing economies Monthly and bi-monthly frequency 7

8 Dating of recession episodes combines quarterly and annual data Quarterly data for all advanced and 22 emerging economies (Burns and Mitchell, 1946) Recession year if at least one quarter in recession Annual data for 24 emerging and developing economies 61 and 45 recession episodes in advanced and emerging/developing economies 40 and 38 recovery episodes (some recessions are not over yet) 8

9 Recession Episodes in Advanced Economies List of Countries and Recessions AUSTRALIA , 2008 ITALY , 1996, 2001, , 2008 AUSTRIA , 2001, 2008 JAPAN 1993, , 2001, 2008 BELGIUM , , 2008 NETHERLANDS 2008 CANADA , 2008 NEW ZEALAND 1991, , 2008 DENMARK , 1997, NORWAY , 2008 FINLAND , 2001, 2008 PORTUGAL , 2002, 2008 FRANCE , , 2008 SPAIN , 2008 GERMANY , , , 2008 SWEDEN , 2008 GREECE , 2008 SWITZERLAND , 1996, , , 2008 IRELAND 2001, 2008 UNITED STATES , 2001, 2008 ISRAEL UNITED KINGDOM , 2008

10 Recession Episodes in Emerging and Developing Economies List of Countries and Recessions ARGENTINA 1995, MEXICO 1995, 2001 BRAZIL 1990, 1992, PARAGUAY 2000, 2002 BULGARIA PERU 2001 CHILE 1999 PHILIPPINES 1998 COLOMBIA 1999 POLAND COSTA RICA 1996 ROMANIA CROATIA REPUBLIC OF KOREA 1998 CZECH REPUBLIC RUSSIA , 1998 DOMINICAN REPUBLIC 2001, 2003 SAUDI ARABIA 1995, 1999 ECUADOR 1999 SINGAPORE 2001, 2008 ESTONIA 1999, 2008 SRI LANKA 2001, 2008 HONG KONG 1998 TAIWAN 2001, 2008 HUNGARY THAILAND INDONESIA 1998 TURKEY 1999, 2001 LATVIA 2008 UKRAINE LITHUANIA 1999 URUGUAY 1995, MALAYSIA 1998 VENEZUELA , 1996, ,

11 Annual GDP growth during recession years in advanced economies tends to be positive Advanced Economies Frequency < <x<= <x<= <x<= <x<=0 2.5<x<=5 7.5<x<=10 Output declines between 2½ percent and 5 percent: Finland after the banking crisis in and Japan in

12 In emerging and developing economies output growth in recessions is mostly negative Emerging and Developing Economies Frequency < <x<= <x<= <x<= <x<=0 2.5<x<=5 7.5<x<=10 Output declines exceeding 20 percent: former Soviet Union in the early 1990s and Albania in

13 The dating of crisis episodes follows Laeven and Valencia (2008) Systemic banking crises Currency crises Debt crises 5 banking and 3 currency crises in advanced economies 26 banking, 26 currency and 6 debt crises in emerging and developing economies 13

14 Recessions in advanced economies are not predicted until they are well underway April of Previous Year Distributions of Actual and Forecasted GDP Growth, Advanced Economies, Actual Forecast April of Current Year

15 The same holds for emerging and developing economies April of Previous Year Distributions of Actual and Forecasted Real GDP Growth, Emerging and Developing Economies, Actual April of Current Year Forecast

16 Distributions of forecasts and actual values converge over time April of Previous Year Distributions of Actual and Forecasted GDP Growth, Advanced Economies, Actual Forecast October of Current Year

17 but not perfectly for emerging and developing economies April of Previous Year Distributions of Actual and Forecasted Real GDP Growth, Emerging and Developing Economies, Actual Forecast October of Current Year

18 Definition of Forecast Errors e = A F t t t, where At is a vector of growth outcomes (the actuals ) Ft is the corresponding vector of forecasts 18

19 Recessions are difficult to anticipate in all economies Recessions: Advanced Countries Forecast Actual Unconditional forecast Recessions: Emerging and Developing Countries Forecast Actual Unconditional forecast Jan. [-1] Apr [- 1] Jul [- 1] Oct [- 1] Jan. Apr Jul Oct -5.0 Jan. [- Apr [- 1] 1] Jul [- 1] Oct [- 1] Jan. Apr Jul Oct 19

20 The record for anticipating recoveries is also imperfect Recoveries: Advanced Countries Forecast Actual Unconditional forecast Recoveries: Emerging and Developing Countries Forecast Actual Unconditional forecast Jan. [-Apr [- Jul [- Oct [- 1] 1] 1] 1] Jan. Apr Jul Oct 0.0 Jan. [- Apr [- 1] 1] Jul [- 1] Oct [- 1] Jan. Apr Jul Oct 20

21 0.0 Forecast Errors in Recession Episodes, (In percent) Advanced economies Emerging and developing economies All recessions Preceded by banking crises Accompanied by currency crises Accompanied by debt crises 21

22 Forecast Errors in Recovery Episodes, (In percent) Advanced economies Emerging and developing economies All recoveries Slow recoveries Fast recoveries After banking crises After currency crises After debt crises 22

23 Short recessions are harder to predict than multi-year recessions in emerging economies Emerging and Developing Economies: Forecast Errors for Post-Crisis Recessions, (In percent) Single year recessions All Multi-year recessions After banking crises After currency crises After debt crises 23

24 One-year and multi-year recessions are almost equally hard to predict in advanced economies Advanced Economies: Forecast Errors for Post-Crisis Recessions, (In percent) Single year recessions Multi-year recessions All After banking crises After currency crises 24

25 Tests of Forecast Efficiency and Bias If I can look at your most recent forecasts and accurately say: Your next forecast will be 2 percent lower than today s, then you can surely improve your forecast. (Nordhaus, 1997) Successive forecasts of the same event should be uncorrelated Regress subsequent revisions on earlier revisions 25

26 Strong Efficiency r = f f + ith,, ith,, ith,, 1 Er [ Φ ] = 0 ith,, ith,,

27 Weak Efficiency = ith,, ith,, + 1 ith,, + 2 ith,, + H E r r, r,..., r 0 r r u = β + ith,, 1 ith,, + k ith,, 27

28 Test of Bias A = a + a F + t u 0 1 t t, Forecasts are efficient if the intercept a0 is zero, the slope a1 is 1, and the errors are random. 28

29 Test of Efficiency Advanced Coeff. St. Error Emerging and developing Coeff. St. Error Middle revision *** *** Middle revision during recoveries Middle revision during recessions *** Middle revision during banking crises * * Middle revision during currency crises *** *** Middle revision during debt crises ** Forecast inefficiency for adjacent forecasts in all episodes Initial revision Initial revision during recoveries Initial revision during recessions ** Initial revision during banking crises Initial revision during currency crises *** Initial revision during debt crises * Number of observations R-squared P-values for Wald tests Middle revision during recoveries 0.01 *** 0.00 *** Middle revision during recessions 0.00 *** 0.00 *** Middle revision during banking crises 0.02 ** 0.05 ** Middle revision during currency crises 0.00 *** 0.00 *** Middle revision during debt crises 0.00 *** 0.00 *** Initial revision during recoveries Initial revision during recessions 0.01 *** 0.86 Initial revision during banking crises Initial revision during currency crises 0.00 *** 0.12 Initial revision during debt crises * Source: Authors' estimate Note: The dependent variable is the final revisions. Asterisks *** (**, *) indicate statistical significance at the 1, 5, 10 percent level. Regressions include dummy variables for 29

30 Test of Bias Advanced Coeff. St. Error Emerging and developing Coeff. St. Error Constant *** *** Dummy for recovery *** Dummy for recession *** *** Dummy for banking crisis ** *** Dummy for currency crisis *** *** Dummy for debt crisis ** Confirmation of broad-based based forecast inefficiency Forecast *** *** Forecast during recovery *** Forecast during recession *** *** Forecast during banking crisis *** *** Forecast during currency crisis *** *** Forecast during debt crisis Number of observations R-squared P-values for Wald tests Forecast 0.00 *** 0.00 *** Forecast during recovery 0.00 *** 0.00 *** Forecast during recession 0.00 *** 0.00 *** Forecast during banking crisis 0.00 *** 0.00 *** Forecast during currency crisis 0.00 *** 0.00 *** Forecast during debt crisis 0.00 *** 0.00 *** Source: Authors' estimate Note: The dependent variable is the actual forecasts. Asterisks *** (**, *) indicate statistical significance at the 1, 5, 10 percent level. The joint Wald test focuses on the hypothesis that the coefficient on the respective consensus forecast is equal to 1 and the respective constant is equal to 0. 30

31 Dispersion of forecasts rises in recessions and recoveries, especially after crises Advanced economies Emerging and developing economies Dispersion of GDP Forecasts (In percent) Unconditional Recession Recession after Banking Crisis Recovery Recovery after banking crisis 31

32 Dispersion of consensus forecasts increases in the run-up up to and during recessions, especially for emerging economies Dispersion of GDP Growth Consensus Forecasts in Recession Episodes Advanced Countries Recession Unconditional Emerging and Developing Countries Recession Unconditional Jan. [-1] Mar. [-1] May [-1] Jul [-1] Sep [-1] Nov [-1] Jan Mar May Jul Sep Nov Jan. [-1] Mar. [-1] May [-1] Jul [-1] Sep [-1] Nov [-1] Jan Mar May Jul Sep Nov 32

33 Dispersion of GDP Consensus Forecasts, Dispersion rises during recessions and recoveries, esp. in crises, but is not a good predictor of recessions Advanced Economies Emerging and Developing Economies Coef. Std. Err. Coef. Std. Err. 1 year before recession months before recession months before recession months before recession month before recession month before recession month before recession month before recession month before recession month before recession * month before recession * month before recession Recession *** *** Recession after banking crisis *** *** Recovery *** *** Recovery after banking crisis *** *** Horizon *** *** Constant *** *** R squared Number of observations 5,346 5,549 Source: Authors' estimates Notes: The dependent variable is dispersion (standard deviation) of consensus forecasts. The dummy variable "Recovery after banking crisis" takes a value of 1 if recovery occurred 2 years after banking crisis in emerging and developing economies and 3 years after crisis in advanced economies. Asterisks (***, **, *) indicate signficance at the 1 percent, 5 percent, and 10 percent level. 33

34 Higher dispersion is associated with larger forecast errors Dispersion of Growth Consensus Forecasts, Advanced Economies Emerging and Developing Economies Coef. Std. Err. Coef. Std. Err. Absolute forecast errors *** *** Constant *** *** R squared Number of observations 5,514 6,293 Source: Authors' estimates 34

35 Conclusions Forecasts errors for recessions tend to exceed those for recoveries In advanced economies, forecasts of recessions and recoveries seem independent of their duration and pace However, in emerging and developing economies, short recessions and fast recoveries are harder to predict Forecasts during crisis episodes are highly uncertain, especially for banking crises It is important to report measures of forecast accuracy (fan charts, dispersion across forecasters) Improvements in leading indicators for emerging and developing economies would be useful 35