MACROECONOMIC FORECASTS AT THE MOF A LOOK INTO THE REAR VIEW MIRROR

MACROECONOMIC FORECASTS AT THE MOF A LOOK INTO THE REAR VIEW MIRROR The firs experimenal publicaion, which summarised pas and expeced fuure developmen of basic economic indicaors, was published by he Minisry of Finance of he Czech Republic in November 1995. The foundaion of his radiional publicaion was hus laid, and i has gradually become a knowledge source for he general Czech and foreign economic public. Sources of ables and graphs: Minisry of Finance of he Czech Republic, European Commission, OECD, IMF, MoF esimaes. The already 16 year hisory of hese regular quarerly forecass provides qualiy source maerial for evaluaing heir success. Such assessmen can help users comprehend how precisely i is possible o idenify fuure developmen of basic macroeconomic indicaors over various ime horizons. A he same ime, i is necessary o realise ha fundamenal changes in he Czech economy occurred during he evaluaed period, as i shifed from a volaile ransiion economy o a more or less sable marke economy wihin he EU. A similar shif occurred in he saisical characerisaion of he economic realiy, and even in he prognosic mehods and procedures used. Thus we have divided he period from 1995 o 010 ino wo periods of equal lengh (1995 00 and 003 010) in order also o be able o evaluae how successfully he forecass have developed over ime. Basic erms All macroeconomic forecass are by heir naure condiioned upon he assumpions adoped regarding he developmen of exogenous facors. Some of hese canno be prediced naural disasers, developmen of financial markes including commodiy prices, or changes of poliical environmen boh wihin and ouside he Czech Republic. Ohers, e.g. impac of srucural policy measures, are very difficul o quanify. Revisions o he underlying daa for pas periods, which especially concern he mos imporan indicaors of he naional sysem of accouns, represen anoher significan source of uncerainy. Idenifying he impacs of hese facors which arise exernally and are enirely beyond he forecas eam s conrol, however, is difficul, if no impossible. In accordance wih he lieraure (see lis), we herefore exclude hese facors from he analysis. The success of macroeconomic forecass is usually evaluaed using several basic saisics average forecasing error, mean absolue error, and Theil s inequaliy coefficien. Average forecasing error (AFE) indicaes forecass deviaion. Posiive AFE values indicae sysemaic or prevalen over esimaion in he forecass, while negaive values indicae under esimaion. AFE is defined by he following relaionship: T F A AFE 1 T, where A is he acual value a ime, number of observaions. F is he forecas for he period and T is he Mean absolue error (MAE) expresses he average absolue error of he forecas as compared o realiy. MAE is deermined as follows: MAE T 1 F A T Theil s inequaliy coefficien (TIE) serves for assessing he success of forecass. The coefficien is defined as he raio of he mean squared errors of analysed forecass and naive forecass: TIE T 1 T A 1 A 1 F A

If Theil s coefficien equals 0, hen he forecas maches he acual siuaion. Coefficien values greaer han 1 indicae ha he resuls of forecas aciviies are worse han hose of he naive forecas. In inerpreing resuls, i is necessary o ake ino consideraion he fac ha his indicaor considerably penalises an isolaed, markedly worse resul as compared o he naive forecas and, by conras, yields a subsanial bonus for well esimaed sudden shifs in he developmen of prediced quaniies. A naive forecas is a mechanically creaed forecas whereby he value of a given indicaor for he year +1 equals he measured, esimaed or forecas value of his indicaor for he year. The forecas horizon is undersood o be he ime from publishing he forecas o he end of he forecas period. All saisics were calculaed in comparison wih he firs esimaes published by he CZSO or CNB, as i is no possible o esimae he scope of changes in pas developmen hrough subsequen revisions of ime series, which for he mos par canno be divided ino componens maerially specifying he given indicaor and mehodological change. Real GDP Growh While forecass from he years 1995 00 significanly overvalued real GDP growh, in he subsequen period he deviaion oward overvaluing growh was already much lower and in a shor ime horizon real GDP growh was insead slighly undervalued. The high mean absolue error in a horizon of over 15 monhs, amouning o 3 p.p. for he enire moniored period, was caused by inaccurae esimaes of real GDP growh in he years 1998 and 009, when he onse of recession was no deeced sufficienly in advance. In connecion wih he recen recession, i is necessary, however, o emphasise ha i was caused exclusively by an unfavourable developmen in he exernal environmen. The difficuly in predicing fuure Graph 1: Average Forecasing Error developmen in his period is evidenced, for example, by comparisons wih he forecass of oher insiuions from his period (see Macroeconomic Forecas, July 008, Chaper D, hp://www.mfcr.cz/cps/rde/xbcr/ mfcr/makropre_008q3_komple_pdf.pdf) or gradual adjusmen of he forecass of inernaional insiuions (see Macroeconomic Forecas, April 009, Chaper A1, able A.1.1, hp://www.mfcr.cz/cps/rde/xbcr/mfcr/ MakroPre_009Q_komple_pdf.pdf). The same explanaion can be offered for Theil s coefficien values, which in a horizon of longer han 4 monhs exceed. The marked decrease in he Theil s coefficien in he second moniored period in he horizon of 6 18 monhs indicaes improvemen in he qualiy of he forecass of real GDP growh. Graph : Theil s Inequaliy Coefficien 3.5 3.0.5.0 36 33 30 7 4 1 18 15 1 9 6 3 0 Revision 1.4 1. 0.8 0.6 0.4 0. 36 33 30 7 4 1 18 15 1 9 6 3 0

Nominal GDP Growh From he viewpoin of he budgeary process, nominal GDP is he mos imporan macroeconomic indicaor. I is used as he denominaor in raio indicaors, and forecass of budge income are derived from he magniude of is componens. Nominal GDP growh in boh moniored periods was slighly overvalued in longer horizons, bu he average forecasing error was significanly lower in he second period and almos zero in a horizon of up o 9 monhs. Graph 3: Average Forecasing Error The mean absolue error, which was lower by an average 35% in he second moniored period, also confirms he increase in he qualiy of forecass. In an 18 monh horizon, which represens he saring poin for preparing he sae budge, absolue error shows a decreasing characer. High values in he years 1997 and 009 fall wihin periods of economic recessions, while ha in 1999 falls wihin a period of disinflaion. The esimae for 010, on he oher hand, was enirely accurae. Graph 4: MAE in he 18 monh horizon 5 4 3 1 0 1 36 33 30 7 4 1 18 15 1 9 6 3 0 Revision 9 8 7 6 5 4 3 1 0 Absolue error Linear rend 1997 1999 001 003 005 007 009 Forecas for year GDP Deflaor Growh Growh in he GDP deflaor was overvalued in boh moniored periods, bu he average forecasing error did no exceed p.p. hroughou he horizon. As wih nominal GDP growh, he significan decrease in mean absolue error during 003 010, which fell by more han wo fifhs on average as compared wih he firs period, was eviden here as well. The graph depicing he absolue error in an 18 monh horizon also confirms his decreasing rend. The error Graph 5: Mean Absolue Error for 1999 falls in a period of disinflaion, when growh of he GDP deflaor fell from 10.8% in 1998 o.7% in 1999. Alhough he decline was expeced and properly idenified in ime, is scope exceeded all expecaions. The Theil s coefficien for he enire 16 year period did no exceed 0.85 a any poin in he horizon, alhough is average values were slighly higher in he second period. Graph 6: MAE in he 18 monh horizon 3.0.5.0 5 4 3 Absolue error Linear rend 1 36 33 30 7 4 1 18 15 1 9 6 3 0 Revision 0 1997 1999 001 003 005 007 009 Forecas for year

Real Household Consumpion Growh Whereas in he firs period he growh of household consumpion was mainly overesimaed, in he second period he forecass were almos unbiased and he average forecasing error did no exceed p.p. in a horizon less han 4 monhs. Mean absolue error is sysemaically lower han forecass of real GDP. Average value of he mean absolue error reaches abou.5 p.p. in he horizon of 3 years, hen i gradually decreases and i is below 1 p.p. in a shor ime horizon of 0 9 monhs. This downward rend is also confirmed by anoher graph showing he mean absolue error in he 18 Graph 7: Average Forecasing Error monh horizon. The errors for 1997 and 1998 fall in a period of recession, when he household consumpion growh slowed from 8.4% in 1996 o.% in 1997 and hen i fell by 0,8% in 1998. Alhough he decline was prediced, is scope exceeded all expecaions. The error for 009 falls also in a period of recession. An ineresing resul is almos accurae predicion for 010, which was publish in 009 wihou he knowledge of Janoa's package o sabilise public finances. The Theil s inequaliy coefficien is roughly a he level of 1 in a horizon more han 1 monhs, hen from he 18 monh budge horizon i is coninuously decreasing. Graph 8: MAE in he 18 monh horizon.5.0 5 4 3 Absolue error Linear rend 1 36 33 30 7 4 1 18 15 1 9 6 3 0 Revision 0 1997 1999 001 003 005 007 009 Forecas for year Average Inflaion Rae Price developmen predicions in he Macroeconomic Forecas were surprisingly accurae in he majoriy of cases. In he main, he forecass slighly overvalued he average inflaion rae. In a horizon of up o 30 monhs, he average forecasing error did no exceed 1 p.p. in eiher moniored period. Similar o he average forecasing error, he mean absolue error in he second period is also significanly lower and has a decreasing characer over he 18 monh budge horizon. The error for 1999 falls ino a period of fierce disinflaion, as he average inflaion rae fell from 10.7% in 1998 o.1% in 1999. Alhough his rend was properly idenified, is scope exceeded all expecaions. On he oher hand, he absolue error did no exceed p.p. during he 18 monh budge horizon in 8 of he 14 years moniored. This can be seen as very posiive. The Theil s inequaliy coefficien never exceeded 0.75 in eiher moniored period over he enire ime horizon.

Graph 9: Mean Absolue Error Graph 10: MAE in he 18 monh horizon 3.5 3.0.5.0 6 5 4 3 Absolue error Linear rend 1 33 30 7 4 1 18 15 1 9 6 3 0 1997 1999 001 003 005 007 009 Forecas for year Average Unemploymen Rae (LFS) The unemploymen rae according o LFS has been forecased only since 000, and hus i was no possible o compare he qualiy of forecass over ime. Forecass sysemaically overvalued he unemploymen rae, bu he average forecasing error did no exceed 0.6 p.p. over any ime horizon. The unemploymen rae was undervalued only in 009, when i grew by.3 p.p. in comparison wih he previous year as a resul of economic recession. Graph 11: Mean Absolue Error Mean absolue error shows a coninuously decreasing rend and does no exceed p.p. in a horizon less han 15 monhs. High Theil s inequaliy coefficien values in he horizon over 18 monhs are due primarily o inaccurae esimaes in he years 007 and 009. The drop in he unemploymen rae in 007 as a resul of rapid economic growh surpassed our expecaions, while in 009 we were unable o deec he onse of he recession sufficienly in advance. Graph 1: Theil s Inequaliy Coefficien.5.0 1. 0.8 0.6 0.4 0. 33 30 7 4 1 18 15 1 9 6 3 0 33 30 7 4 1 18 15 1 9 6 3 0 Curren Accoun o GDP Raio Alhough forecass overvalued he raio of he curren accoun o GDP during he moniored period, he average forecasing error did no exceed p.p. on average in eiher period. The mean absolue error ranged, wih a few excepions, beween 1 p.p. and p.p. and ypically was lower in he second moniored period. Absolue error in he 18 monh horizon shows a decreasing characer. Apar from he 4 monh horizon, he Theil s coefficien is lower in he firs moniored period. In he second period, i even surpassed 1 in he 9 18 monhs range. This can be blamed largely upon a change o he revision sysem which occurred in he second moniored period. While previously revisions were made almos consanly, now his is done only once per year. As a resul, he period in which he forecas is esablished on pas developmen, which, as is laer shown, does no correspond o realiy, hus is exended.

Graph 13: Mean Absolue Error Graph 14: Theil s Inequaliy Coefficien 3.0.5.0 1.8 1. 0.9 0.6 0.3 4 1 18 15 1 9 6 3 0 Revision 4 1 18 15 1 9 6 3 0 Comparing he Success of Minisry of Finance Forecass wih Prognoses of Inernaional Insiuions We have compared forecass of he Czech Minisry of Finance wih he macroeconomic prognoses of OECD, he European Commission and he Inernaional Moneary Fund. In his case as well, we made use of he average forecasing error, mean absolue error and Theil s inequaliy coefficien o evaluae he success of Table 1: Forecass of Real GDP Growh forecass, hough we conduced he comparison only for he period 003 010. The resuls indicae ha he success of all insiuions forecass basically do no much differ. Neverheless, he forecass of he Czech Minisry of Finance and of OECD achieve he bes resuls in he majoriy of cases. Theil s Inequaliy Coefficien MoF EC OECD IMF MoF EC OECD IMF MoF EC OECD IMF 7 monhs 0.78 0.79 0.78.70.59.58 1 0.94 8 1 monhs 0.35 0.44 0 0.13.58.54.40.55 0.85 0.85 0.7 0.80 15 monhs 0.15 0.1 4.38.6 1.88.9 7 5 0.4 8 9 monhs 0.34 0.41 0.39 0.65 1.4 1.16 0.74 8 0.13 0.1 6 0.10 3 monhs 0.8 0.8 0.11 5 8 0.60 0.46 0.75 4 4 3 7 Table : Forecass of Nominal GDP Growh Theil s Inequaliy Coefficien MoF EC OECD MoF EC OECD MoF EC OECD 7 monhs 1.91 1.97 5 3.16 3.50.90 0.99 0.95 0.93 1 monhs 1.11 8 1.45.36.77.30 0.71 0.85 0.47 15 monhs 0.65 0.98 0.98.30.66.8 0.61 6 4 9 monhs 0.10 0.88 1.60 1.83 1.98 0.33 0.6 3 monhs 4 0 0.18 0.66 1.48 0.73 6 0.11 8 Table 3: Forecass of GDP Deflaor Growh Theil s Inequaliy Coefficien MoF EC OECD MoF EC OECD MoF EC OECD 7 monhs 8 0.7 1.45 1.45 0.95 1.9 0.87 0.6 1 monhs 0.73 7 0.93 1.5 1.60 0 0 0.77 0. 15 monhs 0.45 0.73 0.66 1.13 1.41 1.4 0.38 3 0.40 9 monhs 0.1 0.44 1.3 1.16 0 1.73 0.38 0.61 1.13 3 monhs 0.1 0.8 0.44 1.0 0.48 6 0.45 7

Table 4: Forecass of Real Household Consumpion Growh Theil s Inequaliy Coefficien MoF EC OECD MoF EC OECD MoF EC OECD 7 monhs 0.68 5 0.89.08.38 1.96 1.15 1.11 9 1 monhs 0.0 0.67 0.41 3 1.83 9 0.96 3 0.96 15 monhs 1 0.66 4 1.66 1.71 4 0.73 0.79 9 monhs 0.4 7 0.9 4 0.99 0.79 0.33 0.6 0.1 3 monhs 0.33 0.35 0.38 0.78 0.73 0.88 0.14 0.16 0.18 Table 5: Forecass of Average Inflaion Rae Theil s Inequaliy Coefficien MoF OECD IMF MoF OECD IMF MoF OECD IMF 7 monhs 1 0.67 1.49 1.47 0.73 0.76 1 monhs 0.4 0.35 7 1.6 1.37 1.40 0.41 0.4 7 15 monhs 0.3 0.44 0.66 0.94 1.4 0.7 0.1 0.34 9 monhs 0 0.46 0.31 0.7 4 0.39 9 4 3 monhs 1 0.17 0.14 0.0 1 1 1 Table 6: Forecass of Average Unemploymen Rae (LFS) Theil s Inequaliy Coefficien MoF EC OECD MoF EC OECD MoF EC OECD 7 monhs 3 0.30 0.16 1.43 7 1.41 0.89 0.9 0.85 1 monhs 1 3 0.83 1.40 1.30 1.49 1 0.84 1.10 15 monhs 0.16 0.31 0.9 0.87 0.86 0.94 0.74 0.7 0.63 9 monhs 0.7 0.36 0.44 0 6 0.44 0. 0.9 0.0 3 monhs 0 0.1 9 0.10 0.1 0.16 1 8 Table 7: Forecass of Curren Accoun o GDP Raio Theil s Inequaliy Coefficien MoF OECD IMF MoF OECD IMF MoF OECD IMF 7 monhs 0.30 1.43 0.87 1 monhs 5 9 0.43 1.40 1.81 5 0.91 1.61 0.71 15 monhs 0.33 0.1 0.10 1.95.4 1.8 1.30 1.43 0.97 9 monhs 6 0.45 0.18 1.76 8 1.38 1.1 0.95 0.65 3 monhs 0.19 0 0.36 0.76 0 1.9 0.7 0.40 0.61 Noe : As for consumer prices, EC produces only forecass of HICP which is no quaniaively comparable wih naional CPI. IMF Oulook consiss only of forecass of real GDP growh, inflaion and curren accoun/gdp raio.

Conclusion An evaluaion of he hisorical values of Minisry of Finance Macroeconomic forecass showed ha heir qualiy is improving over ime. The Minisry s forecass are fully comparable wih hose of renowned inernaional insiuions, and in several cases are even beer. A he same ime, he Minisry of Finance of he Czech Republic usually publishes is forecass before he oher insiuions included in his comparison do so. Based on he conduced analyses, i can also be saed ha for he majoriy of macroeconomic indicaors he forecass have informaive value on a horizon of up o approximaely 18 monhs. On a longer ime horizon, forecass raher esablish expecaions for he rend of economic developmen. Lieraure: Kousogeorgopoulou, V.: A Pos Morem on Economic Oulook Projecions, OECD Economic Deparmen Working Papers No. 74. Paris, OECD Economic Deparmen, 000. Melander, A., Sismanidis, G., Grenouilleau, D.: The rack record of he Commission's forecass an updae. Brussels, European Commission, 007. Novoný, F., Raková, M.: Assessmen of Consensus Forecass Accuracy: The Czech Naional Bank Perspecive. Prague, Czech Naional Bank, 010.

Table annex Table 8: Forecass of Real GDP Growh 36 monhs 1.76 3.4 0.84.88 3.4.66 1 33 monhs 1.7 3.0 0.90.9 3.10.80 30 monhs 1.48.54 0.83.95 3.10.85 7 monhs 3.53 0.78.89 3.13.70 6 4 monhs 1.34.5 0.45.74 3.08.48 1 monhs 1.18.8 0.35.84 3.18.58 0.9 18 monhs 0.93 1.85 0.4.69.75.64 0.84 15 monhs 0.80 4 0.15.9.0.38 0.70 1 monhs 9 1.6 1 1.87 1.89 1.86 3 9 monhs 0.31 4 0.34 1.45 1.70 1.4 0.34 6 monhs 5 9 0.43 0.91 4 0.80 0.15 3 monhs 0 0.8 0.8 0.63 0.68 8 7 0 monhs 1 6 9 0.35 0.31 0.39 Revisions 0.1 9 0.15 0.71 3 0.43 x Table 9: Forecass of Nominal GDP Growh 36 monhs 3.1 4.9.14 3.84 4.9 3.16 0.94 33 monhs 3.08 4.74.04 3.89 4.90 3.6 0.98 30 monhs.55 3.5 1.95 3.85 4.96 3.15 0.95 7 monhs.78 3.93 1.91 3.96 5.03 3.16 0.86 4 monhs.55 4.13 1.36 3.7 5.33.51 0.91 1 monhs.8 3.83 1.11 3.51 5.03.36 0.83 18 monhs 1.76.95 0.88 3.11 4.08.38 0.75 15 monhs 1.68.86 0.65 3.04 3.89.30 0.7 1 monhs 1.33.7 1.53 3.19 1.96 6 9 monhs 0.78 1.79 0.10.03.53 1.60 0.34 6 monhs 0.40 0.93 6 1.17 1.47 0.91 0.14 3 monhs 0.11 0.6 4 0.85 4 0.66 6 0 monhs 6 0.10 0.36 0.35 0.38 1 Revisions 0.17 0.49 0.11 0.8 1.0 0.49 x

Table 10: Forecass of GDP Deflaor Growh 36 monhs 1.8 1.38 1.3 1.94.74 1.44 0.8 33 monhs 1.18 1.40 4 1.94.76 1.4 0.85 30 monhs 0.95 0.76 6 1.95.9 1.34 0.77 7 monhs 1.10 1.13 8.06.87 1.45 0.74 4 monhs 1.15 1.37 0.98 1.9.83 1.3 0.76 1 monhs 0.97 1.30 0.73 1.97.93 1.5 0.69 18 monhs 0.73 0.88 0.61 1.81.5 1.9 5 15 monhs 0.76 1.11 0.45 1.76.49 1.13 0.43 1 monhs 0.65 0.83 0.49 1.74.31 1.3 0.35 9 monhs 0.40 0.61 0.1 1.93 1.16 0.6 6 monhs 0.31 0.6 0.36 0.95 1.17 0.76 0.1 3 monhs 7 7 0.1 0.60 0.44 3 0 monhs 4 7 0.15 0.6 0. 0.30 1 Revisions 0.34 0.7 4 0.61 0.48 x Table 11: Forecass of Real Household Consumpion Growh 36 monhs 1.18.8 0.49.45 3.16.01 0.94 33 monhs 3 1.88 0.54 3.16.15 0.99 30 monhs 0.95 1.46 0.63.56 3..15 1 7 monhs 1 1.47 0.68.44.93.08 5 4 monhs 0.89 1.43 0.49.6.80 1.86 0.96 1 monhs 9 1.10 0.0 1.99.60 3 0.95 18 monhs 0.39 5 0.8 1.61 1.9 1.38 0.65 15 monhs 0.13 0.6 1 1.65 1.63 1.66 3 1 monhs 0.49 5 1.5 1.3 1.8 0.41 9 monhs 0.3 0.4 0 4 0.6 6 monhs 0.1 0.40 5 0.76 0.63 0.88 0.17 3 monhs 0.3 0.13 0.33 0.69 0.60 0.78 0.11 0 monhs 0.3 9 0.36 0.44 0.39 0.49 5 Revisions 0. 0.7 0.17 0.84 1.6 0.41 x

Table 1: Forecass of Average Inflaion Rae 33 monhs 1.33 8 1.1.11 3.14 1.5 0.75 30 monhs 0.74 6 1.9.70 1.44 0.67 7 monhs 0.69 0.9 1 1.81.5 1.49 0.60 4 monhs 0.96 5 1.88.5 1.40 0.64 1 monhs 0.66 1.3 0.4 1.71.30 1.6 0.46 18 monhs 0.45 0.90 0.11 1.10 6 0.40 15 monhs 0.61 0.94 0.3 1.9 1.60 0.37 1 monhs 0.41 3 0.30 0.86 1.15 0.60 0.14 9 monhs 0.10 0.1 0 4 0.84 0.7 5 6 monhs 6 1 0.3 0.19 1 3 monhs 5 0.11 1 0.15 0.16 0.14 0 Table 13: Forecass of Average Unemploymen Rae (LFS) 33 monhs 7.03 1.17 30 monhs 1 1.70 1 7 monhs 3 1.43 0.89 4 monhs 0.31 1.46 0.87 1 monhs 1 1.40 1 18 monhs 0.31 1.17 7 15 monhs 0.16 0.87 0.74 1 monhs 0.7 0.79 0.6 9 monhs 0.7 0 0. 6 monhs 0.17 0.3 6 3 monhs 0 0.10 1 0 monhs 1 1 0 Table 14: Forecass of Curren Accoun o GDP Raio 4 monhs 0. 0.18.05.48 1.73 0.87 1 monhs 0.13 0.3 5 1.76.3 1.40 0.86 18 monhs 0.1 0.40 8 1.99.17 1.85 0.96 15 monhs 0.47 0.63 0.33 1.97.00 1.95 3 1 monhs 0.39 0 0.30 1.91 1.73.08 0.85 9 monhs 0.4 0.44 6 1.76 1.76 1.76 0.73 6 monhs 0.39 9 0.3 1.39 1.61 1.0 4 3 monhs 0.7 0.35 0.19 0.74 0.73 0.76 0.19 0 monhs 4 0.4 0.15 0.38 0.9 0.48 4 Revisions 0.34 6 8 0.64 0 0.76 x