Federal Planning Bureau Economic analyses and forecasts Increasing uncertainties? A post-mortem on the Federal Planning Bureau’s medium-term projections Francis Bossier Igor Lebrun 39 th CMTEA - Romania, Iaşi, September th, 2008

Federal Planning Bureau Economic analyses and forecasts How to address uncertainty in forecasting?  Scenario analysis (‘variants’): To illustrate effects of potential risks surrounding baseline (results are often presented as deviations from baseline) To illustrate effects of potential risks surrounding baseline (results are often presented as deviations from baseline)  Confidence intervals: Traditionally symmetric (ECB projections for the euro area) but can also be asymmetric to reveal unbalanced risks (‘fan chart’ in IMF WEO)

Federal Planning Bureau Economic analyses and forecasts Why is it useful to evaluate past forecast performances ?  To assess whether forecasts meet basic quality standards: Unbiasedness and absence of serial correlation (weak efficiency) Unbiasedness and absence of serial correlation (weak efficiency) Information set fully exploited (informational efficiency) Information set fully exploited (informational efficiency) Size of error declines when forecasting horizon shortens Size of error declines when forecasting horizon shortens Directional accuracy Directional accuracy Prediction of turning points Prediction of turning points

Federal Planning Bureau Economic analyses and forecasts Why is it useful to evaluate past forecast performances? (2)  To identify possible methodological weaknesses that should be improved  To give users a broad idea of the precision of the forecast  International organizations tend to asses their forecasts on a relatively regular basis: IMF: Working Paper by Allan Timmerman (2006) IMF: Working Paper by Allan Timmerman (2006) OECD: Working Paper by Lukas Vogel (2007) OECD: Working Paper by Lukas Vogel (2007) EC: Economic paper by Melander et. al. (2007) EC: Economic paper by Melander et. al. (2007)

Federal Planning Bureau Economic analyses and forecasts The Belgian Federal Planning Bureau: Short-term macro-economic forecasts  Economic budget: Released twice a year: September for the year t+1 and February for the year t Released twice a year: September for the year t+1 and February for the year t Produced with quarterly macro-econometric model but adjusted for recent business cycle information Produced with quarterly macro-econometric model but adjusted for recent business cycle information  2004: track record for GDP growth and inflation (WP 13-04)  2006: update of post-mortem analysis (WP 4-06)  Project: evaluation of forecasts for larger set of variables

Federal Planning Bureau Economic analyses and forecasts The Belgian federal Planning Bureau: Medium-term macro-economic projections  Economic outlook: Released in Spring with an update in Autumn Released in Spring with an update in Autumn Very detailed macroeconomic projection Very detailed macroeconomic projection Forecast for current year based on a economic budget Forecast for current year based on a economic budget Simulation with six-year horizon using the HERMES model Simulation with six-year horizon using the HERMES model Unchanged policy scenario with regard to fiscal and social policies Unchanged policy scenario with regard to fiscal and social policies  2006: evaluation of GDP growth and budgetary projections (in European Economy, Economic Papers No. 275)  2007: evaluation of past projection errors for a large set of variables (WP 8-07)

Federal Planning Bureau Economic analyses and forecasts The methodology used to evaluate the medium-term projections  Focus on GDP trend growth and trend inflation  Methodology proposed by Jonung and Larch (EP, 2006): For each historical data vintage trend growth is obtained by HP- filtering the series (historical data + projections)For each historical data vintage trend growth is obtained by HP- filtering the series (historical data + projections) The value of year t+1 of the filtered series is taken as the one- year-ahead forecast of trend growthThe value of year t+1 of the filtered series is taken as the one- year-ahead forecast of trend growth The outcome is computed by applying recursively the HP-filter on a rolling sample based on the latest data vintageThe outcome is computed by applying recursively the HP-filter on a rolling sample based on the latest data vintage  Sample starts with 1986 outlook (covering ) and ends with 2006 issue (covering )  Outcome given by the 2008 issue (covering )

Federal Planning Bureau Economic analyses and forecasts GDP trend growth: one-year-ahead forecast

Federal Planning Bureau Economic analyses and forecasts GDP trend growth: one-year-ahead forecast vs. actual estimates

Federal Planning Bureau Economic analyses and forecasts GDP trend growth: Forecasting error

Federal Planning Bureau Economic analyses and forecasts GDP trend growth: Forecasting error and output gap

Federal Planning Bureau Economic analyses and forecasts GDP trend growth and potential export markets: Forecasting errors

Federal Planning Bureau Economic analyses and forecasts Output gap: one-year-ahead vs. actual estimates

Federal Planning Bureau Economic analyses and forecasts GDP trend growth: Contributions to forecasting errors

Federal Planning Bureau Economic analyses and forecasts Descriptive statistics for projection errors ( ) Mean errorNo bias No corr Mean errorNo bias No corr GDP Productivity Employment Positive (negative) mean error = underestimation (overestimation) No bias = probability for zero mean error No corr = probability for uncorrelated errors

Federal Planning Bureau Economic analyses and forecasts Productivity growth: actual and trend

Federal Planning Bureau Economic analyses and forecasts Productivity growth: one-year-ahead forecast vs. actual estimates

Federal Planning Bureau Economic analyses and forecasts Trend inflation: one-year-ahead forecast

Federal Planning Bureau Economic analyses and forecasts Trend inflation: one-year-ahead forecast vs. actual estimates

Federal Planning Bureau Economic analyses and forecasts Trend inflation: Forecasting errors

Federal Planning Bureau Economic analyses and forecasts Price trend growth: Forecasting errors

Federal Planning Bureau Economic analyses and forecasts Conclusions  Difficulty to disentangle trend from cycle at the end of the sample  Risk of running behind the facts because trend growth only “observable” with a huge delay  Increased uncertainty? No clear indication that projection errors have increased recently but only future will tell  Despite size and inertia of projection errors we believe our medium-term outlook remains an important tool for policy-makers, social partners and public in general in terms of diagnosis for the Belgian economy