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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
39th CMTEA - Romania, Iaşi, September 25-27th, 2008
http://www.plan.be
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)

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)
• Information set fully exploited (informational efficiency)
• Size of error declines when forecasting horizon shortens
• Directional accuracy
• 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
forecasts on a relatively regular basis:
• IMF: Working Paper by Allan Timmerman (2006)
• OECD: Working Paper by Lukas Vogel (2007)
• EC: Economic paper by Melander et. al. (2007)
Federal Planning Bureau
Economic analyses and forecasts
asses
their
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
• 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
•
Very detailed macroeconomic projection
•
Forecast for current year based on a economic budget
•
Simulation with six-year horizon using the HERMES model
•
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 HPfiltering the series (historical data + projections)
• The value of year t+1 of the filtered series is taken as the oneyear-ahead forecast of trend growth
• The 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 1987-1990) and
ends with 2006 issue (covering 2007-2011)
 Outcome given by the 2008 issue (covering 2009-2013)
Federal Planning Bureau
Economic analyses and forecasts
GDP trend growth: one-year-ahead forecast
3.5
3
2.5
2
1.5
1
0.5
0
1987
1988
1989
1990
1991
Federal Planning Bureau
Economic analyses and forecasts
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
GDP trend growth: one-year-ahead forecast vs.
actual estimates
3.5
3
2.5
2
1.5
1
0.5
0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
Forecast
Federal Planning Bureau
Economic analyses and forecasts
1997
1998
1999
Outcome
2000
2001
2002
2003
2004
2005
2006
2007
GDP trend growth: Forecasting error
1
0.5
0
-0.5
-1
1987
1988
1989
1990
1991
Federal Planning Bureau
Economic analyses and forecasts
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
GDP trend growth: Forecasting error and output gap
3
1
2
0.5
1
0
0
-1
-0.5
-2
-3
-1
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Forecasting error
Output gap (vintage 2008)
Federal Planning Bureau
Economic analyses and forecasts
2000
2001
2002
2003
2004
2005
2006
2007
GDP trend growth and potential export markets:
Forecasting errors
1
y = 0.4009x - 0.1716
R² = 0.667
Trend GDP growth
0.5
0
-0.5
-1
-1.5
-1
-0.5
0
Potential export market trend growth
Federal Planning Bureau
Economic analyses and forecasts
0.5
1
1.5
Output gap: one-year-ahead vs. actual estimates
One-year-ahead forecast of output gap
3
2
1
0
-3
-2
-1
0
-1
-2
-3
Actual output gap
Federal Planning Bureau
Economic analyses and forecasts
1
2
3
GDP trend growth: Contributions to forecasting errors
0.8
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
-0.8
-1
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Error employment growth
Federal Planning Bureau
Economic analyses and forecasts
1998
1999
2000
2001
Error productivity growth
2002
2003
2004
2005
2006
2007
Descriptive statistics for projection errors
(1987-2007)
Mean error
No bias
No corr
GDP
-0.10
0.37
0.00
Productivity
-0.30
0.00
0.00
Employment
0.20
0.03
0.00
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
4
3.5
3
2.5
2
1.5
1
0.5
0
-0.5
-1
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Trend growth rate
Federal Planning Bureau
Economic analyses and forecasts
1998
1999
2000
2001
2002
Actual growth rate
2003
2004
2005
2006
2007
Productivity growth: one-year-ahead forecast vs.
actual estimates
4
3.5
3
2.5
2
1.5
1
0.5
0
-0.5
-1
1987
1988
1989
1990
1991
1992
1993
1994
1995
Forecast
Federal Planning Bureau
Economic analyses and forecasts
1996
1997
1998
1999
Trend growth rate
2000
2001
2002
2003
Actual growth rate
2004
2005
2006
2007
Trend inflation: one-year-ahead forecast
3.5
3
2.5
2
1.5
1
0.5
0
1987
1988
1989
1990
1991
Federal Planning Bureau
Economic analyses and forecasts
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Trend inflation: one-year-ahead forecast vs. actual estimates
3.5
3
2.5
2
1.5
1
0.5
0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Forecast
Federal Planning Bureau
Economic analyses and forecasts
1998
1999
Outcome
2000
2001
2002
2003
2004
2005
2006
2007
Trend inflation: Forecasting errors
1
0.5
0
-0.5
-1
1987
1988
1989
1990
1991
Federal Planning Bureau
Economic analyses and forecasts
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Price trend growth: Forecasting errors
2.5
1
1.5
0.5
0.5
0
-0.5
-0.5
-1.5
-2.5
-1
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Consumer price
Federal Planning Bureau
Economic analyses and forecasts
1999
2000
Import price
2001
2002
2003
2004
2005
2006
2007
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
Federal Planning Bureau
Economic analyses and forecasts