Saturday 20 July 2019

ESRI's bleak and erratic forecasts may be way out

Think-tank's economic forecasts are called into question by report

Ronald Quinlan

Ronald Quinlan

The prediction by the Economic and Social Research Institute (ESRI) last Tuesday that the economy will grow by just 2.9 per cent next year could be wrong by several percentage points in either direction.

Doubts over the gloomy forecast for 2008 are thrown up by the ESRI's Quarterly Economic Commentary Forecasting Record published in 2005, in which the ESRI itself admitted that while its forecasts were "generally quite accurate", a "slightly pessimistic tendency was in evidence" when its forecasts were compared with the actual economic outcomes.

Commenting on its record in the years between 1994 and 2000, the report notes a "striking pattern" of "underestimation of growth" in which the ESRI managed to talk down the country's predicted levels of growth or GNP (Gross National Product) by 2.8 per cent in its initial forecast each year.

The ESRI's final forecasts between 1994 and 2000 were hardly any better, with the discrepancy between its prediction for the following year and the eventual outcomes averaging a not-insignificant 2.4 per cent.

Remarking on this, the report's author, Shane Garrett, notes how the final forecast errors "remained significant".

While such an admission on the part of the ESRI will hardly inspire confidence, comments in the same report on the economic think tank's performance between 2000 and 2004 make for similarly worrying reading.

"After 2000, forecasting accuracy was more volatile. Forecasts exceeded outturns in both 2001 and 2002, while the trend of underestimation was reverted to in 2003 and 2004," the report notes.

Having conceded that it talked up the economy too much in 2001 and 2002 and then talked it up too little in 2003 and 2004, the ESRI then goes on to compare its dismal performance to the Central Bank and the OECD (Organisation for Economic Co-operation and Development) between 1994 and 2004 in relation to the final figures published by the Central Statistics Office (CSO).

While the three bodies performed relatively evenly up until 1999, all managing to underestimate Ireland's economic growth by figures varying between 1.3 per cent and 3.8 per cent, from 2000 onwards the ESRI at times came a poor third compared with its peers.

In its predictions for 2000, the Central Bank estimated growth in GNP of 8.25 per cent while the ESRI stated its view that growth would reach levels of 5.9 per cent. Final figures produced by the CSO show that growth reached an impressive 9.5 per cent, a whopping 3.6 per cent above the outcome predicted by the ESRI in the previous year.

In an apparent explanation for the discrepancies between its forecasts and those of the Central Bank and OECD, the report notes that their respective predictions are not formulated at the "exact same time" of the year.

In 2001, all three bodies significantly overestimated economic growth, according to the report. The ESRI's prediction for 6.1 per cent growth, the Central Bank's prediction of 7.0 per cent and the OECD's prediction of 7.0 per cent all fell foul of the economic crash in the wake of the September 11 terrorist attacks, which saw growth drop precipitously to 3.9 per cent.

In 2003, the ESRI's prediction of growth of 3.0 per cent and the Central Bank's prediction of 1.75 per cent fare poorly when compared with the OECD's absolutely accurate forecast of 5.1 per cent

Asked last night how he rated the ESRI's performance over the years when it came to economic forecasting, its senior research officer, Dr Alan Barrett, described it as "middling".

Yet despite such middling performances, few in political circles have called into question the judgements of the ESRI, a body which receives some 25 per cent of its funding from the State.

Ordinary members of the public are far more circumspect, however, when it comes to trusting the economic think tank.

Asked in this week's Sunday Independent poll if the Government should listen to the ESRI when it says that taxation should be increased, 62 per cent of those questioned said it should not.

Commenting on the choices facing the Government on taxation policy, one respondent based outside Dublin said: "This will be tricky for Fianna Fail, election promises are still fresh in peoples' minds, how will they convince the people that a lower rate of spending, and a higher rate of taxation are acceptable?"

Another respondent to the Sunday Independent survey said: "Irish people have become smug and complacent, as a nation we claim to want permanently higher levels of public spending on education, health and policing, but we are also unwilling to accept higher taxes. It is like herding cats."

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