Yet, as the former OECD chief economist, Klaus Schmidt-Hebbel, wrote in the OECD Observer (No 269 October 2008), Lehman Brothers’ collapse came as a shock to economists and market participants as well. How did they all get it so wrong? To be fair, some experts, including at the OECD, warned about the dangers of property bubbles, and the risk of the subprime turmoil spreading to other asset classes. But in the final analysis, the OECD moved with the consensus: that the situation was not as bad as it seemed.
This working paper assesses the OECD’s projections for GDP growth and inflation since the start of the global financial crisis, and asks what went wrong and what lessons can be learned. The authors find that OECD projections repeatedly over-estimated growth, failing to anticipate the extent of the slowdown and later the weak pace of the recovery–errors, the authors point out, which were made by many other forecasters. At the same time, inflation was generally stronger than expected. Analysis of the growth errors shows that the OECD projections in the crisis years were larger in countries with more international trade openness and greater presence of foreign banks. The repeated assumption that the euro area crisis would stabilise or ease played an important role in overly optimistic recovery projections, with growth weaker than projected in European countries where bond spreads were higher than had been assumed. Similar-sized errors were made in the first oil price shock of the 1970s, the authors say. Still, the OECD and other international organisations have sought to improve their forecasting techniques and procedures, including paying closer attention to near-term developments, international linkages and financial markets.
Pain, N. et al. (2014), “OECD Forecasts During and After the Financial Crisis: A Post Mortem”, OECD Economics Department Working Papers, No. 1107, OECD Publishing.
See also: www.oecd.org/economics.
©OECD Observer No 298, Q1 2014