Wednesday, February 15, 2006

GDP growth in 2006

The Ateneo Center for Economic Research and Development (ACERD) forecasts a GDP growth for the Philippines of 4.9% for 2006. This is much lower than the government forecast of 5.7% - 6.3%.

A reader has pointed out that my work as forecaster does not seem to square with this earlier post.

Let me qualify: I do not outright proscribe forecasting. I would however treat forecasts with great caution. They are very useful, but they are always accompanied by some range of uncertainty. The forecaster often doesn't even know how much uncertainty is associated with the forecast. The best a forecaster can do is to provide a sound basis for making choices. Sometimes making a choice requires certain scenarios about the future - how much average income will grow in a country, for example. Based on this scenario a choice can be made - to push through with an expansion project; to enact an annual budget. Forecasting can be a great help to making the scenario.

Furthermore, I would hesitate to make a short term forecast about asset or commodity prices. Such forecasts are prone to the arbitrage objection: if based on public information (that is, past trends), then any systematic pattern that could yield a profit opportunity would have already been exploited. This implies that asset prices move in an unsystematic pattern (more precisely, a "martingale" Hat tip: Amadeo). Long term forecasts though, based on fundamentals of supply and demand, are fine. So is a forecast about a vast aggregate that would be useful for planning but of little value to an arbitrageur - for example, GDP growth. But the exchange rate by end of 2006? Forget it!

Personally I feel that 5.0% or so is a safe conservative forecast. It will all depend on how investment improves this 2006 - and investment by far is the most volatile component of GDP, so volatile in fact that Keynes attributes its swings to "animal spirits". If the recent investment downtrend can be reversed (and the reversal can come very sharply), then the economy may conceivably overshoot even the government's sanguine estimate.


cvj said...

Thanks for clarifying this matter.

Amadeo said...

Please comment on the repercussions of the lowered forecast with respect to the government's long-term development plans.

If I heard and read correctly what was needed for overall long-term improvement of the economy was a sustained rate of at least 6%. Because at this rate and above the country, particularly the government, can start addressing the more sticky issues of poverty and unemployment.