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Real-Time Forecasts for the World Economy: A Practitioner's Perspective. Robin Koepke and Emre Tiftik Global Macroeconomic Analysis Department Institute of International Finance George Washington University Washington, DC April 26, 2012. 3 Key Messages about our Forecasts.
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Real-Time Forecasts for the World Economy:A Practitioner's Perspective Robin Koepke and Emre Tiftik Global Macroeconomic Analysis Department Institute of International Finance George Washington University Washington, DC April 26, 2012
3 Key Messages about our Forecasts We use few models and lots of judgment. Knowing the data is key. Forecasts are more than just numbers.
Our Work We produce a monthly “World Economic Framework” with forecasts for all major global macro variables Forecasts include G3 growth, inflation, unemployment, policy interest rates etc. We have a small team of 4-5 people, who devote about 20-30% of their time to the forecasts
What’s the Purpose? Practitioner Forecasts Academic Forecasts Express a view Provide an anchor Tell stories Be right ("forecast accuracy") Find “truth”: understand & establish the relationships between variables …?
Where’s the Model? Appropriate Time of First Policy Rate Hike as per FOMC Number of FOMC participants in favor of time shown on x-axis
Then How Do We do Forecasts? • Short term (0-6 months): tracking data • Medium term (3-12 months): reconcile ST changes with LT view • Long term (6-24 months): adopt a view
Why Use Judgmental Forecasts? (1) • Judgmental forecasts can use information that is hard to quantify • Do you really trust your model? (I only trust it if I like the result.) • Stories matter! • Consistency matters • Time is scarce
Using Judgment: “Known Unknowns” United States: Fiscal Policy in 2013 Percent of GDP, calendar year basis
Our Current U.S. Growth Forecast United States: Real GDP Contributions to growth in percentage points, saar
Using Judgment: “Unknown Unknowns” Japan: Industrial Production and Real Exports Index, February 2011 = 100
Why Not Use a Model? (1) • Last week’s presentation: oil price forecasts have predictive power for GDP growth forecasts • Benchmark model: AR(4) model of GDP • But: if 2008 crisis is excluded, forecast does not outperform benchmark model any more • In October 2008, I did not need an oil price forecast to tell me we were heading into recession
Why Not Use a Model? (2) • The more general point is: benchmark models pretend that we know less than we actually do • The fact that a candidate variable outperforms the benchmark is too low a threshold
How far Ahead Can We Forecast? • Current-year Forecasts: (current state of macroeconomic foresight) • Short term: next 0-6 months • Medium term: next 3-12 months • Now-cast: previous 3 months • Year-ahead Forecasts • Long term: next 6-24 months
Terminology and Concepts • Know your data • Time of data releases • weekly/monthly/quarterly • REVISIONS • Seasonally Adj? • Real vs nominal magnitudes • Calculating annual changes • oyavs y/y vs q4/q4 • Smoothing (3mma) • Extrapolating annualized quarterly rates from monthly data Real GDP Releases Percent change, q/q, saar
Then How Do We Make Forecasts? Forecasting with Spreadsheets • GDP = Private Consumption • + Government Consumption • + Fixed Investment (Business + Residential + Government) • + Net Exports • + Change in Inventories
Then How Do We Make Forecasts? • 2. Information Gathering • Track Your Data • (Framework to incorporate latest releases quickly)
Then How Do We Make Forecasts? • 3. Incorporate the latest information into the Forecast • benchmark models • judgmental forecast
Short-term • Forecasts based on highest available frequency • Consumption: • Real private consumption index • auto sales, retail sales, store sales • Exports and Imports: • Real export and import indices: • 10-day customs trade • 20-day customs trade • Industrial Production • Business Investment: • IP Report, BoJ Tankan Survey, Cooperation Survey
Medium Term • Leading indicators • Shoko Chukin Survey • Economy watchers Survey • PMI (manufacturing/services) • Consumer Confidence Ind. • Survey of Unemployment Trends • Lending Survey • Political Economy
Medium Term • Watch for base effects (inflation) • mean reversion (inventories like an error term) • statistical carryover
Long-term • Adopt a view • Benchmark: assumptions for potential growth (aging population, declining saving rate) • Adopt a view • Make adjustments for other known developments • Example: • External Factors: Euro Area crisis, China • Domestic Factors: political stability (elections)
How far Ahead Can We Forecast? Japan’s Real GDP Growth Rate Percent change, oya, CY 9.7% 1956-69 5.2% 1970s 3.7% 1980s 1.5% 1990s 0.8% 2000s
Real-Time Forecasts for the World Economy:A Practitioner's Perspective Robin Koepke and Emre Tiftik Global Macroeconomic Analysis Department Institute of International Finance George Washington University Washington, DC April 26, 2012