Economic Forecasting in a World of Uncertainty

In 2019, economic forecasting was seen as a relatively stable and predictable exercise. Infometrics chief forecaster Gareth Kiernan recalled how boring it was, with everything evolving as expected. However, the world has since become far more unpredictable. The COVID-19 pandemic, inflation surges, geopolitical conflicts like Russia’s invasion of Ukraine, and volatile oil prices have all made economic forecasting a far more challenging task.

Kiernan noted that forecasting is particularly difficult when outcomes are heavily influenced by the actions of a few individuals, such as former US President Donald Trump, whose decisions are often unpredictable. Additionally, unprecedented events like the COVID-19 pandemic or extreme market conditions, such as the current highs in sharemarkets, make it hard to predict future economic trends. Forecasters must decide whether to assume a return to normalcy or acknowledge that this time might be different.

ANZ’s Sharon Zollner pointed out that economic forecasters often have a poor track record, sometimes making weather forecasters look better. She questioned whether forecasts should even be used to set monetary policy, suggesting that rules based on current data might be more effective. The Reserve Bank of New Zealand has adopted a more flexible approach, emphasizing data dependency and openness to changing circumstances, contrasting with the US Federal Reserve’s reduced forward guidance.

Westpac chief economist Kelly Eckhold suggested that returning to a more predictable economic environment would require a return to multilateral cooperation, such as the Washington Consensus. The current geopolitical tensions, including conflicts in Ukraine and the Middle East, have contributed to elevated uncertainty. ASB acting chief economist Kim Mundy highlighted the difficulty in predicting outcomes, especially those influenced by events in the Middle East, which could significantly impact global economic stability.