Predictions | The forecasts of financial institutions were overoptimistic in recent years, says a recent report – “The throw is very significant”

Finns economic institutions’ forecasts of economic development have been overly optimistic in recent years.

The matter is revealed by the chief economist of Soste ry, the umbrella organization of the social and health sector Otto Kyyrönen from the report made.

According to the report, the forecasts exceeded the actual economic growth by an average of 1.2 percentage points per year in 2018–2019 and 2021–2023. The first year of the corona pandemic, 2020, was not included in the survey.

Kyyrönen considers the average jump of 1.2 percentage points to be significant in Finland’s economic situation.

“If Finland’s economy were to grow, for example, four percent a year on average, such a throw would not be big,” Kyyrönen tells STT.

“On the other hand, the economy grew by an average of about one percent per year in the years under review. Compared to this, the upward throw of the forecasts by a good percentage point is very significant.”

In the investigation the business cycle forecasts of a total of ten Finnish financial institutions were examined. Not all institutions had published a forecast for all the years included in the review.

The Ministry of Finance, the Bank of Finland, the Institute for Economic Research Etla, Pellervo Taloustutkimus PTT, the Labor and Economic Research Institute Labore, the Cooperative Bank, Danske Bank, Nordea, Aktia and Lähi-Tapiola were involved.

Kyyrönen reviewed a total of 38 financial forecasts from these institutions. Only one forecast underestimates next year’s economic growth. The remaining 37 forecasts predicted better economic growth for the following year than was ultimately realized.

For example, last year the Finnish economy shrank by 1.2 percent. It was the only year between 2018 and 2023 when the economy shrank, if the corona year 2020 is not included. However, on average, the institutions predicted a growth of 0.6 percent for last year.

Of the institutions included in the survey, PTT was the only one that predicted a contraction for the year 2023. Still, PTT’s forecast was also 0.7 percentage points more optimistic than the actual development, as the institution predicts a drop of only 0.5 percent for last year.

Danske failed the most in its forecast for last year, which predicted growth as much as 2.8 percentage points higher than what was finally realized.

The only ones the institutions that had prepared a forecast for each year under review were Suomen Pankki, Etla, Osuuspankki (OP), PTT and Labore. Of these, Labore’s business cycle forecasts on average showed the most upside, 1.5 percentage points.

Laboratory’s research supervisor Ilkka Kiema served as the department’s forecasting manager in most of the years that were included in the review. He says that the result of the report is not surprising.

“Even though the forecasts for the corona year 2020 have been left out of the survey, that year will weigh on the longer-term economic growth,” says Kiema.

“Then there was Russia’s attack on Ukraine in 2022. Nobody was prepared for that and the rise in energy prices.”

Kiema says that without these crises, Labore’s predictions could have been quite close to the actual economic development.

I’m working manager Mika Maliranta is on the same lines. Based on this report, he wouldn’t talk about, for example, a systematic bias in the forecast models of Finnish financial institutions.

“I wouldn’t call the period 2018–2023 a skew yet. If there happens to be some kind of driving force in the economy that has not been able to be estimated in the forecast, it will affect the forecasts for several years,” says Maliranta.

According to him, one could start talking about bias in the event that a similar shift in forecasts could be seen over a longer period of time.

“If we were to see, for example, twenty years of observational data, that the forecasts are systematically more positive or negative than the actual growth”, I would call it a bias.

“Now it could still be a coincidence.”

An explanation Kyyrönen, chief economist at Sosten, says that overly optimistic forecasts can be a problem if significant economic policy decisions are made based on them.

“If we always assume that the economy will grow the following year, adaptation always seems more reasonable than recovery,” says Kyyrönen.

“However, sometimes we might need a stimulus if the economy shrinks, as it did last year, for example.”

Fresh economic forecasts have been published again for the end of summer and beginning of autumn.

For example OP predicted in August that the economy in Finland would grow by two percent next year. At the beginning of September again Danish predicted 1.8 percent and Nordea 1.5 percent growth for the coming year.

The hunchback according to the public debate, growth forecasts have been taken as a sign that Petteri Orpon (kok) the government’s adjustment measures are justified.

“I have noticed that some economists and public debaters have pointed to these growth figures and said that the government’s adjustment measures are now very well timed, because next year we will grow”, says Kyyrönen.

He says that a similar discussion took place in public last fall as well. According to Kyyrönen, there was talk at the time that the economy could grow this year and that the adjustment would therefore be well timed.

“Now, however, it seems that the Finnish economy will probably not grow this year, but may even contract. In that sense, the adaptation was not well timed,” says Kyyrönen.

Laboren Maliranta also says that forecasts are used and needed in economic policy decision-making. However, he reminds that the forecasts focus on other things as well as GDP figures alone.

“Economic forecasts are scenarios. In addition to the GDP figures, they predict the overall course of the economy, i.e. how the whole will progress”, explains Maliranta.

“The scenario means that at the same time we look at how, for example, employment and things like that develop.”

According to Maliranta, alternative development trajectories are also outlined in connection with the forecasts. This means modeling what happens to unemployment and wages, for example, if economic growth is slower than predicted.