DALLASFED Economic Letter VOL. 11, NO. 9 • JULY 2016 Economic Letter he reliability of global econom- ic forecasts is an increasingly pressing concern for house- holds, firms and policymakers. The possibility of greater trade and for- eign investment opportunity can affect households’ income potential and factor into current consumption and savings decisions. Firms can raise prices, expand their workforces and invest in new productive capacity based on expected strength in world demand rather than just domestic activity. Thus, how households and firms assess global prospects has major impli- cations for economic activity and ulti- mately for central bank policymaking. Growth estimates have been impre- cise over the past quarter century, based on a review of the accuracy of forecasts of next-year annual gross domestic prod- uct (GDP) growth for 40 advanced and emerging economies. 1 Forecasts for these countries are obtained from Consensus Economics’ Consensus Forecasts and the International Monetary Fund (IMF). The nations’ collective output represents more than 80 percent of the world’s GDP in purchasing power parity-adjusted terms (allowing cross-country compari- sons) from 1991 to 2014. 2 Resulting forecasting errors—the dif- ference between actual growth and the T Risk, Uncertainty Separately Cloud Global Growth Forecasting by Alexander Chudik, Enrique Martínez-García and Valerie Grossman predictions—appear to arise from a mix of risks to the global outlook and under- lying economic uncertainty. Forecasting Accuracy and Biases The estimated mean of forecasting errors in the sample is slightly negative but statistically indistinguishable from zero, suggesting that forecasters are systemati- cally neither pessimistic nor optimistic about predictions, on average (Table 1). Estimates of the standard deviation of the forecast errors—a measure of how widely distributed the errors are—in the table imply a 90 percent probability that actual global GDP growth will be within a 4.9 percentage-point range for IMF fore- casts and a similar range for Consensus Forecasts. 3 Put another way, there is a 1-in-10 chance that 2016 world GDP growth will be below roughly 1 percent or above about 6 percent, based on the spring 2015 World Economic Outlook from the IMF and the April 2015 release of Consensus Forecasts. It is worth noting, however, that the short time dimension of the sample precludes a statistically meaningful comparison of the two fore- casts’ performance. 4 Individual Country Data Estimates in Table 1 are aggregates based on a limited sample of 24 annual } ABSTRACT: Forecasts of global growth have historically been imprecise, punctuated by periods of optimism and pessimism. Inaccuracy in forecasting partly refects quantifable risks to the global outlook as well as economic uncertainty.