Sources of deterioration in forecast accuracy during the global financial crisis

Abstract

This study assesses World Bank (WB) forecasts for growth in real gross domestic product (GDP) and its subcomponents during the global financial crisis of 2008 and the consequent Great Recession in 2009. Several have examined macroeconomic forecasts for advanced economies conducted by intergovernmental agencies, such as the International Monetary Fund and the Organization for Economic Co operation and Development. However, few studies have investigated the WB’s forecasts for emerging and developing economies. Therefore, in order to fill this research gap, this study investigates the subcomponents that caused a deterioration in the WB’s forecast accuracy of real GDP growth during the Great Recession in the aftermath of the financial crisis. This study finds that efficiency in and unbiasedness of the WB’s forecasts are often rejected under crisis. We find that private consumption plays a major role in explaining forecast error and upward bias of real GDP growth, while public consumption broadly exhibits an upward bias. The relative importance of private consumption increases during crisis than non-crisis periods, and for next-year forecast than current-year forecast. It suggests that monitoring and improvement in private consumption forecasts during non-crisis and crisis periods are crucial for forecasters and forecast users.