OECD admits overstating growth forecasts amid eurozone crisis and global crash

A demonstrator clashes with riot police during a strike in Athens, Greece, 2012. The OECD said a failure to predict the path and the impact of the eurozone crisis, and a failure to understand the banking crisis and how interdependent the global financial system had become, were to blame for forecasting errors. Photograph: Aris Messinis/AFP/Getty Images

A failure to spot the severity of the eurozone crisis and the impact of the meltdown of the global banking system led to consistent forecasting errors in recent years, the Organisation for Economic Co-operation and Development admitted on Tuesday.

The Paris-based organisation said it repeatedly overestimated growth prospects for countries around the world between 2007 and 2012. TheOECD revised down forecasts at the onset of the financial crisis, but by an insufficient degree, it said.

"Forecasts were revised down consistently and very rapidly when the financial crisis erupted, but growth out-turns nonetheless still proved substantially weaker than had been projected," it said in a paper exploring its forecasting record in recent years.

The biggest forecasting errors were made when looking at the prospects for the next year, rather than the current year.

The OECD said a failure to predict the path and the impact of the eurozone crisis, and a failure to understand the banking crisis and how interdependent the global financial system had become, were to blame for the errors.

"Challenges were compounded by the unusually high speed and depth of cross-country interconnections between real and financial developments, the increased variability of economic growth compared with the pre-crisis period, the lack of timely data on many important financial factors, and the limited understanding of macro-financial linkages," it said.

The OECD said a failure to understand the impact of austerity policies in various countries did not appear to be a major driver of forecasting inaccuracies. It said the OECD became better at factoring in the impact of austerity amid little space for further monetary loosening as the crisis continued.

Overall, "fiscal consolidation is not significantly negatively related to the forecast errors".

Changes that have since been introduced to address some of the issues include a closer monitoring of short-term developments, for example by taking more notice of early signals from surveys and other anecdotal evidence.

Work has also begun on improving economic models to better reflect the impact of banking sector behaviour.

"The macroeconomic models available at the time of the crisis typically ignored the banking system and failed to allow for the possibility that bank capital shortages and credit rationing might impact on macroeconomic developments," it said.