Economic forecast helps everyone from government officials to businesses and households understand where the economy is headed. But making a good one isn’t easy.
Understanding what influences economic trends is the key to creating accurate forecasts. For example, monetary policy—the decisions central banks make about interest rates and money supply control—can affect the speed at which economies grow and the level of inflation. In general, lower interest rates stimulate borrowing and investment, while higher ones discourage both and can help control inflation.
Other factors can also disrupt growth. Global events and geopolitics, for instance, can alter local industries and lead to fluctuations in the exchange rate. In addition, high government debt can constrict fiscal space and force consolidation, lowering spending and increasing interest rates. High unemployment can depress consumption and raise savings, slowing growth. Rising trade barriers and heightened policy uncertainty may also weaken economic expansions.
A major challenge in predicting future economic conditions is the time it takes to gather and analyze data. For example, a quarterly report on gross domestic product (GDP) takes several months to publish after the end of a quarter. Moreover, each estimate for GDP can be revised later. That’s why nowcasts of economic indicators—such as the St. Louis Fed’s GDPNow—are useful. They provide an early-release, revised estimate of a quarter’s real GDP, which is then used to create longer-term forecasts.
To help improve forecast accuracy, economists often combine qualitative and quantitative approaches to analysis. This approach combines expert intuition and analytical rigor to enhance the depth of economic analysis, resulting in more holistic economic forecasts.