An economic forecast is a projection of the growth rate of a nation’s economy. Such a forecast provides an important input to policy decisions by central banks and governments. Forecasts are typically made for national gross domestic product (GDP), a broad measure of the total value of all the goods and services produced in a country, but forecasts can also be made for individual industries or for subsets of the economy.
Many techniques are used to produce economic forecasts. At one end of the spectrum are judgmental methods that rely on the expertise of the individual forecaster to adjust forecasts produced by a suite of models, and at the other extreme are dynamic stochastic general equilibrium (DSGE) model-based forecasts disciplined by modern economic theory.
A forecast of economic activity is typically made for a specific period. For example, a business might want to know whether to invest in a new plant or machinery during one year or another. But economic forecasts are also made for much longer periods, such as five or ten years. Such long-range forecasts have gained increasing importance as businesses have come to recognize the usefulness of such information in planning expansion and financing.
Some categories of economic output are particularly difficult to forecast. The biggest problem is investment spending, which reflects thousands of individual and corporate decisions that can be changed very dramatically. As a result, business investment tends to be highly volatile. The erratic behavior of this category of economic output has stimulated an extensive literature on the development and evaluation of forecasting techniques.