It has not been easy to be a forecaster in the last three, four years. The pandemic was followed by an unexpectedly rapid economic recovery. And then the Ukrainian war came and turned everything upside down.
But still, even a couple of months after the outbreak of war in February 2022, the collective body of economists predicted significantly lower inflation and nowhere near as high interest rates as is now the case.
Of course, inflation was on the rise, but it would blow over fairly quickly, something that was repeated month after month. Thus, the interest rate would not be so high.
“We overestimated how quickly this would go over,” says Ylva Hedén-Westerdahl, head of forecasting at the Norwegian Economic Institute.
Different bids on housing prices
The Russian influence on the world’s economy was judged by many to be relatively small overall, despite the great dependence on the Russian raw material resources. This is how the Economic Institute wrote on March 30, 2022, among other things:
“The effects of the war in Ukraine on Swedish GDP are judged to be comparatively small after all.”
About developments in the housing market, Swedbank wrote on April 4, 2022:
“The housing market is moving towards more uncertain times. We believe that the price rise in the housing market is now slowing down and that the price increase will level off in the second half of this year and we expect roughly unchanged prices next year”.
Conclusion so far: Almost 20 percent down since the peak in spring 2022.
Reality ran away
The households that followed the advice/forecasts are probably regretting it now. A fixed mortgage, likewise a fixed electricity price agreement (even if the state now partly compensates for the expensive electricity) would have been a smarter choice than listening to economists and journalists who conveyed the messages. Buying a home was also not so smart, financially speaking.
On March 30, 2022, the state-owned Konjunkturinstitutet, which is usually considered to belong to the heaviest forecaster, released an assessment that, among other things, predicted that the Riksbank would raise the key interest rate to 0.8 percent at the end of 2023. February 10, 2022, i.e. a few weeks before the Russians launched a full-scale attack on Ukraine, the Riksbank predicted that the policy rate would remain at zero on average during 2023.
Now most forecasters, including the Riksbank itself, believe that it is rather on its way up to 3.50 percent until spring/summer (from today’s level of 3.0 percent).
The households that ignored the assessments that applied a year ago and instead tied the mortgage interest rate for five years to around 2.0 percent, a standard five-year interest rate in March 2022, have earned many thousands of Swedish kroner a month instead of moving to an interest rate that has now ticked up to nearly four percent.
Better than SMHI?
It was probably why the new Riksbank Governor Erik Thedéen recently equated his own interest rate assessments with SMHI’s weather forecasts. Ylva Hedén-Westerdahl picks up:
— You can hope for sun, but still take an umbrella with you.
The same applies to the forecasts for inflation and GDP. Last year, the Norwegian Economic Institute made an analysis of how much error all forecasters had on average during the period 2017–2021, in predicting the economy in the current and future years.
The average error for GDP was a full two percentage points for the next year. The inflation error averaged 0.8 percentage points. Foreign-based forecasting institutes such as the OECD and the European Commission had the fewest errors on GDP, according to the Norwegian Economic Institute’s review.
Had the corresponding analysis been carried out today, the errors would have been even greater. For the past year, not much has gone right.
Sure, a lot has gone wrong, most prognosticators admit, the surprising events of recent years have been almost impossible to predict.
— But what is the alternative, what else would one base their assessments on? says Ylva Hedén-Westerdahl.
— They must be taken with a pinch of salt.