Chris Johns: Forget forecasting. We need to know what’s going on now

One of the many paradoxes facing the practical economist is insatiable demand for economic forecasts alongside overwhelming evidence that forecasting is a complete waste of time.

When Queen Elizabeth asked UK academics why they hadn’t see the financial crisis coming, their response was to express astonishment that anyone would expect economists to be able to make accurate forecasts of any kind, let alone spot a serious recession was on the way.

All economists think like this; they nevertheless persist in making forecasts, mostly because there are still plenty of people willing to pay for them – that insatiable demand.

A more nuanced approach to crystal ball gazing is required. The traditional approach is to assert GDP growth will be x, unemployment y, and so on. A better, more intellectually honest, method would be to make some very conditional, very hedged forecasts.

For example, we might say that provided the euro doesn’t blow up again, the UK and US economies continue to display robust growth and we don’t get Sinn Féin levels of taxation, the Irish economy should grow robustly. We probably can’t be any more precise than this but things like the budgetary process require us to put some numbers on our humble guesses.

So we could say, given all of our assumptions, the economy should grow by 2-4 per cent. The more statistically-minded might go on to say there is, say, a 90 per cent chance of growth falling in this range.

When we hear somebody saying something like “growth will be 2.8 per cent” it is almost certainly the case that the forecaster himself is aware of the spurious precision involved when making such prognostications.

Corporations and governments need forecasts to facilitate the planning process. It would be better to use a different language however. Instead of ‘forecasts’ we should describe the future in terms of ‘assumptions’. And there should also be a much more explicit analysis of what action will be taken if those assumptions turn out to be wrong.

Economic consequences

The debate over whether or not the government should provide resources to ‘cost’ the economic manifestos of the ever- increasing number of political parties here misses these points. It is a debate that assumes, upfront, that forecasting the economic consequences of different taxation and spending policies can be done accurately and consistently. For the most part this is simply not true.

There are a few things of a general nature we can say with reasonable certainty. For example, given the usual assumptions about the euro and the international economy, we can forecast less growth and higher unemployment under Sinn Féin's economic strategy than under Fine Gael policies. That's a 'costing' done for free.

A much more elaborate, expensive, exercise might have more intellectual gravitas but would reach the same conclusions and involve numbers of dubious if not spurious precision. (Of course, should anyone wish to pay for such an exercise, please contact me in the usual way.)

One of the few really interesting innovations in forecasting methods has been the development of something called Nowcasting. The future is all very well, but we have an equally tough task in figuring out where the economy is right now – or what it has been doing over the recent past.

Economic data is often dramatically revised and only ever paints a partial snapshot of current conditions. Traditionally, forecasters spend an awful lot of time trying to figure out what the most recent run of data might be saying. Some new statistical techniques have taken this process away from tea-leaf reading and turned it into something that might even be described as scientific.

Nowcasting is a new discipline and has yet to enter the mainstream. But the current message of the Nowcasting models is absolutely fascinating. They suggest that Europe is doing much better than is generally thought and that the US economy has slowed down a touch. One or two models are saying Europe is actually growing faster than the US. If momentum really is with the European economy, the ongoing fall in the euro, the start of quantitative easing and low commodity prices (not just oil) will combine to produce a much better outcome for the Irish economy than most orthodox forecasters currently have in their numbers.