How do Companies Create Economic Forecasts?

How do Companies Create Economic Forecasts

Economic forecasts are provided by a range of city and non-city forecasters, which then get picked up by those trading. But how do they come up with this data and just how accurate is it?

The most important thing to remember is that economic forecasting is far from an exact science. Even the most seasoned forecasters can make mistakes, but with more technology and experience they can be more accurate.

Economic Indicators

There are a variety of indicators that these companies use to inform their forecasts. These statistics are the starting point, though there are many more factors to take into account too. Not all of them carry the same weight either, as some will have a more drastic impact on the projections than others.

These include the gross domestic product, consumer price index and even the price of crude oil. Some of these figures can be tracked on a daily basis but others are released more periodically. These start off the process of economic forecasting, but there’s a lot more to get involved with too!

Using a schedule of these indicators over the year, forecasters can plot which direction in which the economy is going. There are of course outlying and surprising factors which can also have a much bigger effect, but these can’t really be accounted for in advance.

How accurate can these be?

As time goes on, the margin of error between forecasts and actual events is getting smaller. Part of this is down to the technology that we can use now, which is a lot more accurate than most human calculations. Even artificial intelligence can be used to more accurately plot these trends.

Morgan Stanley and Commerzbank are among the most accurate city forecasters, getting within less than a percent of the final figure for many forecasts. A study from ETX Capital investigated the forecasts when compared to the actuality provided by three major city forecasters. They found Capital Economics was within a 0.1 percentage point of the final result, which is an incredibly close view.

Why is Economic Forecasting Important?

If you’re not very involved within the economic sector, you might wonder why these forecasters put so much emphasis on them. They can be highly useful in a range of different scenarios for traders, political pundits and more. Being able to predict the economy can even build trust within it, as being able to predict the economy means it’s easier for traders to get involved with it.

When it seems that some of these forecasters can be wrong more times than they are right. While this may be the case at times, the actual forecasts themselves are important. By comparing forecasts from many different companies, we can start to build up a much clearer picture of what’s going on with our economy. Using data from each of them gives a more accurate overall view, which can then be used by investors, bankers and more.

Next time you look at an economic forecast, you’ll be able to tell just where those figures came from and how you could be using them to your advantage in future.

Editorial Team
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