Economic forecast is the process of predicting how much the economy will grow or shrink, using tools such as time series analysis, regression analysis and scenario analysis. This activity is important to businesses that plan for future expansion and to investors who want to know what kind of returns they can expect on their investments.
Formal forecasting techniques typically begin with a theory of how the economy works. Some theories are complex, requiring an elaborate tracing of cause and effect; others are more basic, ascribing most changes to one or two major factors. For example, some economists believe that changes in the supply of money are a key factor in economic growth, while others believe that investment in new facilities—housing, factories and highways—is the primary driver of long-term business activity.
Although economic theory may determine the general outline of a forecast, judgment also often plays an important role. For example, if the economy is experiencing unusual circumstances that are not likely to repeat in the future, a forecast produced by standard statistical methods may need to be modified by an application of judgment. Such modifications should be clearly explained so that those wishing to use the results of the exercise will understand where and how they were influenced by the analyst’s judgment, or bias.
In general, respondents are more likely to say that global economic conditions are worse now than they were six months ago (Exhibit 1). Respondents in Sub-Saharan Africa, which is heavily reliant on foreign demand and high aid appropriations, are particularly gloomy. They are more likely to expect declines in economic activity than respondents in other EMDE regions, and all anticipate rising unemployment.