Optimistically biased economic growth forecasts and negatively skewed annual variation

Abstract

<p>Authoritative economic growth forecasts are often optimistically biased. One possible reason is that growth often has negatively skewed variation--negative shocks tend to have larger magnitudes than positive shocks, as the Great Recession and COVID-19 crisis illustrate. Negative skewness means that average growth over decades is smaller than typical-year (median or mode) growth, which would positively bias forecasts based on typical years. Here, we quantify this aspect of negative skewness in real per-capita GDP growth since the Industrial Revolution (1820-2016), by comparing medians and means across countries, regions, and time windows. Over decadal periods, we find mean growth rates to be &amp;lt;1%/y smaller than median growth rates in most countries and regions (median 0.23%/y across countries). Surprisingly, we find these differences are driven by negative skewness in both large- and medium-magnitude shocks, rather than only large shocks ('black swan' events). We also find our measure of negative skewness correlated with slow average per-capita GDP and population growth, high per-capita GDP growth volatility, and high per-capita GDP and population, building on previous studies. We find that recent over-projections of growth--by the International Monetary Fund (IMF), the U.S. Congressional Budget Office (CBO), and the Shared Socioeconomic Pathway (SSP) scenarios informing climate change research--have mostly been larger than can be explained solely by negative skewness, suggesting other sources of bias exist.</p>

Plausible 2005–2050 emissions scenarios project between 2 °C and 3 °C of warming by 2100

“…IEA 2019) also included a second, slightly more pessimistic, BAU-like Current Policies Scenario (CPS)-assuming no further policies would be implemented beyond those already enacted. Both CPS and STEPS CO 2 emissions have been successively revised down in recent years, for reasons including faster-than-projected renewable energy deployment growth, slower coal growth, and slower economic growth (Frankel 2011, de Resende 2014, Ritchie and Dowlatabadi 2017, IEA 2019, 2021, Burgess et al 2020, 2021. The IEA discontinued using CPS in 2020 due to the implausibility of a future with no new climate policies (IEA 2020).…”

Most plausible 2005-2040 emissions scenarios project less than 2.5 degrees C of warming by 2100

“…Previous IEA WEOs (e.g., IEA 2019) also included a second, slightly more pessimistic, BAU-like Current Policies Scenario (CPS)-assuming no further policies would be implemented beyond those already enacted. Both CPS and STEPS CO2 emissions have been successively revised down in recent years, for reasons including faster-than-projected renewable energy deployment growth, slower coal growth, and slower economic growth (IEA 2019(IEA , 2020Frankel 2011;de Resende 2014;Ritchie and Dowlatabadi 2017;Burgess et al 2020. The IEA discontinued using CPS in 2020 due to the implausibility of a future with no new climate policies (IEA 2020).…”

Prepare developed democracies for long-run economic slowdowns

“…1a,b). Moreover, authoritative economic forecasts-such as those by the International Monetary Fund (IMF) (which the SSPs are based on pre-2018 39 ) and national governments-have historically tended to over-project growth and were successively revised down [42][43][44][45][46] (Fig. 1a,b).…”

“…Other reasons that forecasts have tended to over-project economic growth include political pressures, changing productivity trends and output gaps failing to close as assumed (see refs. [42][43][44][45]48 and references therein).…”

“…2f). This correlation deserves attention from fiscal planners, given the tendency of growth forecasts to over-project [42][43][44][45] . Other coincident twenty-first-century forces-such as the need to mitigate or adapt to climate change-will place additional, but worthwhile, demands on public spending, increasing deficits and debt burdens, all else being equal.…”