Navigating Uncertainty: Evaluating the European Economic Forecasts Amidst Pandemic and Energy Crises

The European Economic Forecasts (EEFs) are an integral part of the European Commission's Treatybased economic and budgetary surveillance framework. To increase the transparency and credibility of its forecasts, the Commission regularly evaluates forecast performance, focusing on point estimates of three prominent variables in the Commission's economic surveillance: GDP growth, inflation, and the general government budget balance. This paper updates the previous regular report, covering the additional period 2018-2023. The analysis evaluates the quality of the forecasts – in terms of unbiasedness, efficient use of the information available, and correction of past errors. To this purpose, a number of basic metrics are calculated and econometric methodologies/tests are run, as in past exercises, but with the additional challenge posed by the large volatility in the economic variables due to the pandemic and energy crises. The study also explores the potential sources of forecast inaccuracies, including the role played by the assumptions underpinning the forecasts and economic uncertainty. The analysis is reinforced by model-based decompositions of forecast errors using the Commission's Global Multi-Country Model. Lastly, the report updates the comparison of the Commission's forecast performance with that of other international institutions. Overall, this updated exercise confirms that the Commission’s forecasts provide a largely unbiased picture of the near-term economic outlook, accurately foresee the trends in its key variables and tend to perform better than ‘naïve’ forecasts that utilise no other information than the most recent reading for the target variable. The accuracy of the Commission’s GDP growth forecasts was found broadly similar to that of other major international institutions.