Economic forecast is a process by which economists make predictions about future economic trends and conditions. A common method for making these predictions is by using statistical time series models. Time series models are based on the assumption that relationships between economic variables, like GDP or unemployment, follow a predictable pattern, as described by economic theory.
Forecasts are used by governments, businesses and stock market analysts for a variety of purposes. Governments use forecasts to determine their multi-year plans and budgets, while businesses use them to predict the value of their company and stock. The main goal of economic forecast is to provide an accurate and unbiased prediction of future economic conditions.
Despite the efforts of many economists to improve forecasting accuracy, it has proven difficult to achieve this objective. A large part of the reason has to do with the inherent subjectivity of the practice of predicting the economy. Economic forecasts are heavily influenced by the type of economic theory that the forecaster buys into. For example, if one economist believes that business activity is determined by the supply of money while another believes that hefty government spending is bad for the economy, the two economists will produce very different projections. Moreover, forecasts are often skewed by the need for economists to play it safe. Bold projections can damage an economist’s reputation, so most forecasters tend to stick to the consensus for fear of losing their jobs. As a result, bold projections are rarely seen.