Early last year, the Bank of Canada forecast the country's economy would grow by 2.8 per cent in 2009; predictions that $200 (U.S.)-a-barrel oil was in view seemed plausible; and subprime mortgage losses in the U.S. were widely expected to cause little more than a temporary slowdown.
Needless to say, things haven't turned out that way.
Canada's central bank now sees the economy shrinking by 1.2 per cent this year. Oil prices have plunged below $40 (U.S.) a barrel, after peaking last summer at around $147. And the insidious effects of the subprime mortgage crisis have raced around the world, triggering what many are calling the worst economic crisis since the Great Depression.
It hasn't been a good year for those who make their living predicting the economy. As Bank of Canada governor Mark Carney wryly noted in a speech in December: "Few forecast these events, although in an outbreak of retrospective foresight, an increasing number now claim they saw it coming. The reality is that among all the banks, investors, academics and policy-makers, only a handful were able to identify ahead of time the causes and potential scale of the crisis."
The few who warned of impending danger were often ignored or written off as cranks. Nouriel Roubini, an economics professor at New York University, earned the nickname "Dr. Doom" after making dire predictions about a U.S. economic collapse long before most people started piecing things together. Now, he is widely viewed as a prophet of the financial crisis.
Meanwhile, jokes are flying that economic forecasters are about as reliable as meteorologists – which is to say, not very.
So how could so many economists have missed the scale of this crisis?
For one thing, they're just not that good at forecasting "turning points" like recessions.
"This is not unique. If you went back to the forecasts in the early 1980s and early 1990s, they weren't very well predicted either," said Don Drummond, chief economist at Toronto Dominion Bank.
Adding to the problem was the fact that the usual symptoms weren't present this time. The last two recessions were "pretty much textbook form," Drummond said. They were preceded by rapid growth and spikes in inflation, which prompted central banks to jack up interest rates and crash the economy in the process. Inflation started coming down, the central banks lowered interest rates and the economy recovered.
"So in that sense, even though the forecasts weren't great, there wasn't that much rocket science involved in doing them," Drummond said. "There was a playbook and you could kind of look back at previous cyclical experiences."
But the current crisis threw many forecasters for a loop, although Drummond said his own bank had the story "dead-on from 2005 on that these subprime mortgages in the U.S. were just going to be the death of us all," even though its timing was off in spots. There was no run-up in inflation, and interest rates started going down, not up, fairly early in the process, Drummond said. There was also a new element this time around: the seizing up of credit markets in the United States and elsewhere.
Economic forecasting doesn't adapt well to novel situations.
"If you have something happening that has happened in some way before, then you have a chance of forecasting it," said Peter Dungan, professor of business economics at the Rotman School of Management at the University of Toronto. "If it's a new thing, you don't have much chance ... What happened this time was largely new."
Human nature may also have had something to do with the fact that so few economists went out on a limb.
"There's a considerable reward for being the outlier and being right, but I think there's a severe punishment if you're an outlier and you're wrong because then you really look bad," Drummond said. "It's not like everybody missed it. You alone missed it."
Or, as U.S. economist Edgar R. Fiedler once bluntly observed, "The herd instinct among forecasters makes sheep look like independent thinkers."
There was also a general feeling until late last summer that turmoil in financial markets wasn't going to spill over significantly into the real economy.
"That was a reasonable assumption, because we've seen quite a few upsets in the financial side of the economy without there being an awful lot of negative impacts on the real side," said Dale Orr, chief economist for Canada at IHS-Global Insight.
That changed in the fall as financial institutions teetered in the U.S. and elsewhere and the full scope of the crisis started to become apparent. Some economists admitted they were stumped.
"Trying to do an economic forecast in this kind of turmoil is a bit like trying to put a value on your house while the kitchen is on fire," Douglas Porter, deputy chief economist at BMO Capital Markets, said in October.
Around the same time, economic forecasters at the University of Toronto put out an unusually frank release that was titled, in part, "We don't have a clue and we're not going to pretend that we do."
Despite all that, economic forecasters continue to forecast, and governments, the financial sector and ordinary people continue to dissect their prognostications.
Glen Hodgson, chief economist at the Conference Board of Canada, said forecasts are based on "incredibly complicated mathematical models" – some 1,250 equations in the case of his organization's Canadian forecast.
"Forecasters, frankly, are always wrong," said Hodgson. "Nobody is ever spot-on on all the variables. It's a question of trying to minimize the error on each of the key variables, and our track record is probably at the top of the chart there over the long term."
Forecasters also often have to make their calls without all the data in front of them. Economists started making dire predictions for 2009 last fall when economic growth figures were available only from the first half of 2008, Orr said.
"It's probably better than what most people think it is because they don't take account of what data you actually have in hand," Orr said. "On the other hand, if I'm giving talks to engineers, for example, I have to really emphasize that economics is a social science."
He added that, since the economy went into freefall in September, IHS-Global Insight has "consistently been ahead of most other forecasters in foreshadowing the tough times ahead."
But even now, forecasters don't seem to be able to get it right. No one was more surprised than economists when Statistics Canada reported earlier this month that 129,000 jobs had evaporated in January. The consensus had called for only 40,000 net job losses.
Forecasts for Canadian economic growth in 2010 are all over the map. The low is around 1.6 per cent. The highest forecast, from the Bank of Canada, is 3.8 per cent, a figure that has raised eyebrows.
"It fascinates me, the criticism the Bank of Canada has received on its forecast," Drummond said. He noted that TD's forecast is less optimistic than the central bank's, but said that 3.8 per cent growth "is not that heroic" after two years of weakness.
"It's a little bit odd for one forecaster to be throwing a stone at somebody else's glass wall," he added.
