Why are economic predictions so often wrong

Economic crisis: why economic forecasts are often miles off the mark

When a new Robin Hood film hits theaters, you should be prepared for the worst. Because every premiere so far - regardless of whether Kevin Costner, Russell Crowe or Errol Flynn played the pantyhose in Sherwood Forest - coincided with the outbreak of an economic crisis.

Underwear Theories and "Lipstick Index"
The Robin Hood Barometer is by no means the only bizarre economic test that even economists trust: Alan Greenspan, for example, the legendary long-time head of the US Federal Reserve, firmly believed in the thesis that economic turmoil heralds the fact that men are less likely to buy new underwear to buy. The "lipstick index", on the other hand, says that women especially like to invest in bright colors when trouble is brewing on the stock exchanges. Narrow ties and longer women's hairstyles, on the other hand, are supposed to promise a zest for life and thus an economic upswing - just like the "skirt hem theory" put forward in 1926 by the economist George Taylor “: If confidence rises, the skirts get shorter, miniskirt promises boom.

Does everything sound like voodoo and thumbs up pi? Right. But it is often no further off than the professional economic forecasts, which are based on highly complex models and tricky formula calculations. Because there has only been one trend for these for years: they are guaranteed to be miles off the beaten track. The economic forecasts have to be revised massively with unpleasant regularity, and only recently the domestic economic research institutes had no choice but to meekly cut their growth forecasts in half. Instead of almost two percent, as predicted in the spring, the domestic economy will only grow by 0.9 percent this year - or by less or more, because the statistical probability that these forecasts are also wrong is quite high. Since the economic crisis hit in 2008, virtually every forecast has been wrong. All of this could be dismissed as an academic calculation error if large parts of politics were not based on economic forecasts - from budget planning to the calculation of a tax reform.

Economic forecast as a lottery game
Predicting economic development has never been an exact science, but now it is increasingly resembling a lottery game with a vanishing hit rate. "The forecasts are much less accurate than in the past, and they have always been too optimistic in the end," says Ulrich Schuh. The economist heads the research institute EcoAustria and knows what he is talking about: In his previous job at the Institute for Advanced Studies (IHS ) with the quarterly economic forecast. Schuh has developed a theory as to why economic researchers were so often wrong recently: "The world has been different since the financial crisis, many economists have not yet internalized that. They are continuing patterns from the past, but they are no longer valid. ”For example, an earlier basic rule states that every economic downturn is followed by a recovery. This is exactly how the economic researchers acted, says Schuh: "An upswing is hoped for year after year - but it always disappears into thin air."

This is by no means only true for Austria. In Greece and other crisis countries, too, the economic recovery is reliably predicted for "next year" - only to have to be postponed again for a year. The banal motto "Principle of Hope" also seems to apply to economists. It is always predicted at the beginning of the year that the economy will really start to buzz now - by autumn at the latest, there will be a lot of backtracking. National Bank Governor Ewald Nowotny, for example, made headlines last winter with the optimistic sentence "The crisis is over." Last week, there was a bitter awakening, the National Bank revised its growth forecast down to just 0.8 percent Incidentally, the data from the Asfinag motorway company, which counted fewer truck journeys.The logic behind this is understandable even for laypeople: If fewer goods are being transported, it is a clear signal that the economy is slowing down.

Sigmar Gabriel's swipe
The real culprit, however, is Germany of all places, which has reliably played the role of the economic engine since the financial crisis, but is currently scraping past the recession itself. Exports collapse, and the German government also had to cut its economic forecast in mid-October. Economics minister Sigmar Gabriel couldn't help but swipe at the economic experts and their predictions when announcing this bad news: "Sometimes I have the impression that it is more about economic theology than economics."

Economic forecasts, nothing more than questions of faith?

Markus Scheiblecker, the economic expert at the Economic Research Institute (Wifo), has come up with a humorous answer to the low hit rate in response to the rising criticism. He says: "The economic forecasts are based on many assumptions: How will the oil price develop? How will the euro and dollar exchange rates? If I knew that exactly, I would speculate on the oil price and euro exchange rate so that I could earn my money and would not have to torment myself with economic forecasts . "Indeed, predictions are particularly tricky, especially for a small economy like Austria, because many external factors play a role, such as the conflict in Ukraine. In a globalized economy, international crises are particularly serious Banks in Vienna hardly bothered anyone, nowadays Cyprus’s problems extend to this point.

Scheiblecker sees no trend in the same direction
In view of all these imponderables, Scheiblecker thinks that the forecasts are “not that bad.” The only real worry would be a wrong trend in the same direction over and over again, and there is none: In the end, the forecasts were far too positive for the sluggish economic situation in which In 2010 and 2011, on the other hand, Wifo and IHS estimated economic growth of 1.6 and 1 percent too low by half. After all, excessive pessimism and optimism keep each other in balance - also a consolation.

If the economic forecasts have been so wrong for years, it is no great wonder that the budget deficit always turns out differently than assumed - after all, the budget planning of the federal government is based on the forecasts of economic researchers. Interestingly enough, too much optimism and too much pessimism cannot be seen here from the temperature curve, on the contrary: the deficit was always wrongly calculated in only one direction. Since 2011 it has been consistently significantly lower than predicted. In September of the previous year, for example, a supposedly gigantic "budget hole" appeared, but the political excitement of autumn disappeared just as suddenly as it had appeared. The budget deficit for 2013 was 1.5 percent - the forecast was much higher 2.3 In 2012, a deficit of 3.2 percent had been calculated, in fact it was 2.6. And in 2011 the deficit ended up at 2.5 instead of the predicted 3.2 percent.

Forecasts and reality influence each other
Two reasons for these constant mispredictions of new borrowing are easy to find: firstly, the officials of the finance ministry traditionally plan a certain cushion, secondly, the interest that the republic had to pay for its national debts in recent years was bargain and significantly lower than expected. Two other reasons are a bit more complicated: Forecasts and reality influence one another. If a weak economy is predicted and the government puts together an economic stimulus package in response, the forecast and deficit planning are already out of date.

Last but not least, the gross domestic product (GDP), which is used to measure the deficit and forecasts, is anything but an exact figure: This includes the shadow economy such as drug trafficking, botch and prostitution, the extent of which nobody can really quantify. In addition, GDP is constantly being corrected retrospectively. To this day, for example, Statistics Austria continues to provide new figures for the GDP in 2012 and thus changes the GDP in retrospect. The data on how much energy domestic companies have consumed are important for calculating GDP, but only arrive with a long delay.

In this respect, not only are the economic forecasts for the future a game of chance, but also those for the past are sometimes only triumphs for a second. Paradoxically, even years later, it is impossible to say exactly how much the economy has grown or shrunk.

Incidentally, a new Robin Hood film has not yet been announced for 2015, and skirts up to just over the knee will be the hit of the season for the coming winter. In short: the economic forecasts, which are based on fashion and other soft factors, do not yet show a clear direction for the coming year. You may be able to turn things around in the direction you think is likely by making bold underwear and lipstick purchases, or wearing ties and skirts that are appropriate for the economy. If your forecast was wrong and the haircut does not suit the economic situation, you are at least in illustrious company with your misconceptions.