Abstract
The Great Recession in Germany was noticed only seven months after its onset. This study examines whether the available data could have helped to predict or identify the crisis in real time. After assessing the accuracy of previous recession forecasts, we examine that of forecasts published from April to December 2008 by twelve major national and international forecast institutions and confront them with real-time data from official statistics, major surveys, and indicators. While annual forecasts for 2008 were unusually accurate due to errors of semi-annual forecasts offsetting each other, forecasters failed to observe the onset of the recession in Q2 2008, although from May onward an increasing amount of data indicated that the economy was in recession or was likely about to enter one. Though the data were neither ambiguous nor misleading, forecasters recognised the onset of the recession as late as mid-November, but also failed to warn of a coming recession. The most convincing explanations for these failures to recognize the crisis in time appear to have been the ‘truth effect’ and forecasters’ ‘low priors about the likelihood of a recession’.
Acknowledgements
Previous versions of this paper were presented at the 32nd Annual International Symposium on Forecasting, Boston, June 24–27, 2012; the 31st CIRET Conference in Vienna, September 5–7, 2012; the DGSt Annual Meeting in Berlin, September 17–20, 2013; the Annual Meeting of the Econometrics Committee of the Verein für Socialpolitik, Rauischholzhausen, February 26–28, 2015, and the 35th Annual International Symposium on Forecasting in Riverside, CA, June 21–24, 2015. For their critiques and suggestions, we thank Klaus Abberger, Roland Döhrn, Katja Drechsel, Harald Lehmann, Udo Ludwig, Wolfgang Nierhaus, Ataman Ozyildirim, Herman Stekler, and Stefan Wappler. Particular thanks go to three anonymous referees of this Journal. For skilful research assistance, we thank Karsten Müller, MSc.
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Appendix
Sources of forecasts
Overview 1: Signals, April to December 2008
April: Positive signals came from production, sales in manufacturing, and orders in February and from the labour market in March and rising consumer prices and wholesale prices.
Negative: the Ifo-BCI continued to cool down remarkably.
May: Positive: real GDP in Q1 2008 indicated robust growth compared to Q4 2007, which was similar but only about one-third of the growth in the euro area and EU; employment growth continued in April; manufacturing and wholesale sales (March), consumer prices (April) and Ifo-BCI (May).
Negative signals emerged from declining orders in the construction industry, diminished retail sales and reduced import prices.
June: Positive signals, an increase in new orders in manufacturing, a rise in sales of manufacturing (April); exports had increased in April, as had in May increased employment and orders in the construction industry in May, amid rising consumer and producer prices.
Negative signals came from new orders in manufacturing and declining production in manufacturing in April as the Ifo-BCI cooled down considerably.
July: Positive signals included increased retail sales and imports in May and rising employment in June. Strong gains of GDP in the EU in Q1, drastically improved employment in the service sector during the same quarter, and robust increases in manufacturing, strong increase of consumer prices and producer prices, all caused by rising energy prices.
Negative signals were manufacturing and construction orders, a declining Ifo-BCI, falling wholesale sales, amid which the ECB raised interest rates (0.25 ppts.).
August: Positive signals came from exports, slightly increased industrial production in June, with its decline May revised slightly upwards. Employment and wholesale sales had increased a strong increase of consumer prices and of import prices.
Negative signals emerged from lower nominal retail sales, lower new orders in manufacturing, stagnant imports, increased wholesale prices, and shrinking GDP in Q2 (flash estimates: –0.2, now –0.5). Notably fewer construction outlays, a shrinking GDP in the euro area (by –0.2 percent) and in the EU (by –0.1), expansion of employment diminished in Q2, and lower new orders in construction in Q1 and Q2. The Ifo-BCI worsened. Agreed wages and salaries hardly exceeded the inflation rate, which also had slightly declined.
September: Among positive signals, sales increased in various service sectors in Q2, as did imports. Consumer prices rose in July, the public deficit dropped in Q1–Q2, employment slightly increased in August, whereas wholesale prices declined, employment in manufacturing rose, and new orders in industry and in construction improved in July.
Negative signals were exports and manufacturing sales decreased in July – particularly in the euro area – wholesale sales in real terms dropped in August, and producer and consumer prices sank. The Ifo-BC Index further deteriorated in September.
October: Positive signals include a considerable increase of new orders in industry in August, sinking import prices, increased wholesale and retail sales, and increased employment. The ECB also lowered interest rates (–0.5 ppts.).
Negative signals included a considerable drop of exports and imports in August, a further worsening of Ifo-BC Index in October, a slight increase in collectively agreed wage and salary incomes (real terms) and considerable drop in consumer prices.
November: Among positive signs were a slight increase in manufacturing employment, an increase in wholesale prices in October, stable producer prices in manufacturing, and a slight increase in new orders in September. The ZEW-FMI rose amid increased employment, exports and imports in September. The government decided upon measures to promote growth by 50 billion in 2009 and 2010.
Negative signs included a sharp decline of new orders in industry in September, which coincide that month with a steep fall in production in manufacturing — primarily in industry but also in construction — and manufacturing sales in September after an upward revised increase in August, a shrinking GDP in Q3 (flash estimate 0.5 %), a further worsening of the Ifo-BCI, a shrinking GDP in the euro area and in the EU by 0.2), a slowing down of employment expansion, shrinking wholesale sales and sharply falling of the inflation rate.
December: Positive signs include increasing exports and imports in October as well as in Q3 in general, increased employment, and lowered ECB interest rates (–0.75 %).
Negative signs included shrinking retail sales, a decreased GDP in the euro area zone and in the EU by 0.2 in Q3, shrinking sales in manufacturing in October, diminished production in manufacturing, industry, and construction. The Ifo-BCI worsened further in December, amid a sharp decline in new construction orders, a heavy fall of wholesale prices in November, amid a declining increase in consumer prices, and a strong decline in producer prices and in import prices.
Sources: See text and Overview 2*(See supplemental material in the online version of this article).
Supplementary Material
The online version of this article offers supplementary material (DOI:https://doi.org/10.1515/jbnst-2016-1002).
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