Département des Affaires économiques

 1. What differentiates OECD projections from other forecasts?
With so many economic forecasts being published, what are the distinguishing features of the OECD projections? Most importantly, the OECD projections and the accompanying analysis have a clear focus on framing the policy debate in Member countries. Moreover, the OECD projection exercise distinguishes itself by a number of special features which are absent in most other forecasts: 1.  The OECD assessments of the future trends of key macroeconomic variables are better characterised as conditional projections rather than forecasts, since they are conditional on a set of technical assumptions about nominal exchange rates and the path of oil- and non-oil commodity prices as well as on mandated macro policies. Thus, the OECD projections provide answers to questions like: "What is likely to happen in country X if the government implements mandated fiscal measures?", or, "On mandated policies, what kind of imbalances or pressure points are likely to develop over the next two years e.g. in the form of widening current account imbalances or higher unemployment?". This in turn helps to identify potential problems in the economy and to foster a debate among policy makers about what can be done to achieve better outcomes.
2.  The OECD projection process ensures that projections are consistent at the world level. First, consistency is sought through the OECD's "internal" production process. The twice-yearly forecasting exercise starts with a broad exchange of views among OECD country experts and topic specialists. This provides a consistent starting point for the global outlook and its potential interactions with individual country projections through trade and financial linkages. Second, international consistency is ensured via a predetermined iteration process feeding through the OECD's INTERLINK world economic model, and by discussions between country and international trade experts.
3.  There is a built-in "reality check" as the OECD benefits from the participation of government experts and policy makers in arriving at its projections. The OECD holds extensive discussions on the projections and related analyses with Member country government experts and policy makers. The OECD meets with government and central bank economic forecasters to test its tentative conclusions against their knowledge of local conditions. The main lines of the Economic Outlook projections and analysis are presented to, and their policy implications discussed by, the OECD Economic Policy Committee, which is composed of senior officials from finance or economic ministries and central banks. Finally, country expertise is drawn from the surveys of Member and selected non-member economies published regularly by the OECD.
 2. What do the projections cover?
Projections of domestic demand components and output (GDP) are made in "real" terms, i.e. adjusted for inflation. Labour market prospects are summarised by the unemployment rate and inflation is measured in particular by the "GDP deflator", the broadest measure of domestically generated inflation, and by the consumer price index (often referred to as "headline inflation"). As already mentioned, particular attention is given in the projection exercise to ensuring the consistency of international trade volume and price projections, trade representing a principal channel through which developments in one country affect other economies. The current account balance measures a country's external trade and payments position. It includes trade in goods and services as well as the balance on foreign investment income and official transfers. These projections are only the "tip of the iceberg". A vast number of other important variables are projected as well, including among other things, government, business and household accounts, supply potential and output gaps, labour market flows and stocks, short and long-term interest rates, indicators of competitiveness, foreign trade flows (goods and services) and current external balances. A great number of the projected variables are published in the Economic Outlook in the Annex Tables  that cover developments for up to two decades or so including the projection period.  A fuller coverage of historical data and projections across countries can be obtained from the Economic Outlook data CDROM.
 3. What are the critical variables and relationships?
The performance of an economy reflects the interaction of many economic variables and underlying relationships. The main economic relationships examined may be summarised as follows: Domestic expenditure. Projections of private consumption typically take into account real disposable income, household wealth, changes in the rate of inflation, monetary and financial conditions, and leading indicators of consumer confidence and retail sales. Business fixed investment is mainly assessed in relation to non-financial indicators (sales, output and capacity utilisation) and financial variables (cash flow and interest rates). Business survey information is also taken into account. Projections for residential construction take account of demographic trends, housing stocks, real income and financial conditions, and also draw on cyclical indicators for the construction sector. Projections of stockbuilding are usually made with reference to relevant stock-output and stock-sales ratios. Employment, wages and prices. Employment and other labour market trends are generally assessed on the basis of actual and projected output. Important additional elements relate to productivity trends, capacity constraints and costs. Unemployment rate projections are derived from employment and labour supply projections, with the latter assessed on the basis of demographic trends and participation rate assumptions. Wage and earnings assessments take into account a number of key factors, such as the pattern of current wage settlements data as a leading indicator. Labour market demand pressures, productivity developments and the terms of trade also influence the overall projection for real wages and real compensation per employee. The assessment of domestic prices and inflation trends depends crucially on unit costs, the strength of demand output gaps and foreign prices. Output gaps. The output gap is measured as the difference between actual and estimated potential GDP, in volume terms and in per cent of potential GDP. Output gaps are difficult to estimate and subject to substantial margins of error, since the concept of constant prices is odd now that chain-linking is becoming the norm. Potential output is based on a production function approach, taking into account the capital stock, changes in labour supply, factor productivities and underlying "non-accelerating inflation rates of unemployment" (NAIRU) for each Member country. Foreign trade and balance of payments. As noted on several instances, particular attention is given to ensuring the consistency of international trade volume and price projections, since trade represents a principal channel through which developments in one country affect other economies. The initial projections for aggregated import volumes of goods and services are derived from activity (expenditure) and lagged competitiveness positions. Aggregate goods and services export volume projections are based on developments in export markets and competitiveness positions. Projections for export prices (the deflator for goods and services exports as measured on a national account basis) are based initially on movements in unit labour costs, import prices, and competitors' export prices while import prices are derived as weighted averages of foreign costs and domestic prices. Investment income receipts and payments reflect returns on stocks of external assets and liabilities.
 4. Who is responsible for the projections and analysis?
The discussions between OECD staff and national policy makers are valuable because they harness Member countries' knowledge and expertise. However, while being given due consideration, comments and suggestions from Member countries are not automatically reflected in the final version of the Economic Outlook. In the end, the published projections and analysis reflect the independent assessment of economic conditions in the world economy by the OECD staff economists. The Economic Outlook is published under the responsibility of the Secretary-General.
 5. Do you do medium term projections or scenarios?
Projections of domestic demand components and output (GDP) are made in "real" terms, i.e. adjusted for inflation. Labour market prospects are summarised by the unemployment rate and inflation is measured in particular by the "GDP deflator", the broadest measure of domestically generated inflation, and by the consumer price index (often referred to as "headline inflation"). As already mentioned, particular attention is given in the projection exercise to ensuring the consistency of international trade volume and price projections, trade representing a principal channel through which developments in one country affect other economies. The current account balance measures a country's external trade and payments position. It includes trade in goods and services as well as the balance on foreign investment income and official transfers. These projections are only the "tip of the iceberg". A vast number of other important variables are projected as well, including among other things, government, business and household accounts, supply potential and output gaps, labour market flows and stocks, short and long-term interest rates, indicators of competitiveness, foreign trade flows (goods and services) and current external balances. A great number of the projected variables are published in the Economic Outlook in the Annex Tables  that cover developments for up to two decades or so including the projection period.  A fuller coverage of historical data and projections across countries can be obtained from the Economic Outlook data CDROM.
 6. Are OECD projections accurate?
A post-mortem on Economic Outlook projections OECD projections are just that, projections and not predictions. Analysis enriches the projections and provides a framework for evaluating outcomes and recommending policy changes. As to the risks, analysis can only point to them, it cannot say precisely which ones will occur or when. Economics is not an exact science. It deals ultimately with human behaviour, which changes based on experience and expectations. And it must strive to adapt as economies and economic systems evolve. The OECD regularly reviews its projections for accuracy. A main purpose of these reviews is to isolate whether errors are due to data revisions, to the non-realisation of underlying assumptions or to judgmental mistakes about economic conditions and forces shaping the outlook. Indeed sometimes projections show current policies leading to unsatisfactory outcomes, which may lead to policy changes, in turn showing up as (desirable) projection errors. Large projection errors typically occur around major turning points in economic activity. The reasons for this are subject to debate. They may be due to lapses in judgement, or a decline in the predictive power of the information available at cyclical turning points. On the latest assessment of the accuracy of the OECD projections see Vogel (2007), Lenain (2002) , and  Koutsogeorgopoulou (2000).

 

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OECD Economic Outlook No. 78, December 2005

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