Understand the economic forecast errors of this century and what this has to do with 2024 – 01/02/2024 – Vinicius Torres Freire

Brazil’s growth forecast errors were an issue of the Old Year. This 2024, it would be a good idea to make some French toast from this stale bread. The idea here is not to promote a seminar in order to increase the precision of estimates, which is valid, of course. But to ask again the question of 2023: has anything changed in the economy? Is the size of the change relevant? Does it change diagnoses of what needs to be done in the country?

Before proceeding, here is a reminder of the errors of this century, based on estimates collected weekly by the Central Bank, the prophecy of “the market” — in this case, the forecast made at the end of one year for the next, compared to GDP data ” of the time” (no revisions).

Since 2000, the arithmetic average of Brazil’s growth has been a measly 1.84% per year (2.3%, after revisions); the average error size was 1.91 percentage points (the absolute value of forecasts minus the GDP released at the time). Huge. It’s like trying to walk through a door and running into the wall. Even when epidemic years are eliminated (2020-21), the average growth is 1.98% per year; the error, at 1.74 points.

The errors are not a collusion between finance and its economists against PT governments. Growth was overestimated in all the years of Dilma Rousseff, for example. Forecasts are historically optimistic. If Focus’s estimates were correct, Brazil would have grown 82% since 2000; grew by 53% (according to unrevised, “period” data).

Errors are recurring. In the 22 years for which extreme forecast data is available, growth was outside the range between minimum and maximum in 15 of them. That is, it was higher than the most optimistic forecast or lower than the most pessimistic.

The predicted growth for 2023 was 0.8%. It must have been 3%. For 2022, forecast of 0.4%. GDP grew 2.9% (later revised to 3%).

Wrong projections are the nature of the métier, it is not new or just here. Recent errors are more annoying because there seems to be an unknown unforeseen event, perhaps some ignored or poorly measured force.

Caveat: Still, the improvement won’t be much. We have not even transformed into a China with growth now reduced to 4.5% per year, of course.

“Unknown unforeseen event”? Yes, there are unforeseen events that are in the known catalog of shocks and changes.

For example, there may be war, epidemics, exorbitant droughts or rains, a rise in oil prices. Governments can briefly anabolize the economy. There may be political turmoil (masses in the streets, impeachments and the like) or financial crises in the world. Given these shocks, it is possible to understand the size of the error. In 2023, perhaps there was an unknown unforeseen event.

Some of the people who make forecasts claim that agriculture has grown a lot (but the big harvest was predicted and, even so, the weight of agriculture is small to explain the deviation). It says that the increase in government spending was large, but we already knew that in December 2022. Yes, there was extra progress in exports. There was work: more people employed, earning more; low unemployment with falling inflation. There is an unknown there.

Would the economy have become more productive, with “market reforms” or, I don’t know, through changes in the organization of post-pandemic production? There is controversy and the available numbers do not yet confirm the change. Has there been a change in the behavior of economic agents?

The Brazilian economy is volatile, dependent on prices and consumption of (volatile) commodities, subject to many changes in politics and economic policy. Prediction models always have problems, which worsen with insufficient and recent data, as is our case. There will be mistakes as far as the eye can see. It is important to know their reasons, if only to help us think about what the Brazilian economy is.

The forecast for 2024 is an increase of 1.5% in GDP, with a maximum estimate of 2.5% and a minimum of zero.

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