"Economic Forecasts Are Not Natural Science... Frequent Changes in Projections Are Common"

Bank of Korea May Monetary Policy Meeting Press Briefing
Lee Chang-yong "Lowering Trust Because Forecast Was Wrong Is Not Right"

[Image source=Yonhap News]

As the Bank of Korea significantly raised its economic growth forecast for this year from 2.1% to 2.5%, criticism arose that it had failed in its prediction. In response, Lee Chang-yong, Governor of the Bank of Korea, said, "(Economic) forecasts are not natural science," adding, "It is common to revise forecasts."

At a press conference held immediately after the Bank of Korea's Monetary Policy Board meeting on the 23rd, Governor Lee addressed the criticism that "the Bank of Korea's economic growth forecast for the first quarter was a major failure," stating, "We must humbly strive to improve if the forecast failed or if credibility has declined." However, he clarified, "What I want to strongly emphasize personally is that revising forecasts happens frequently." He cited the International Monetary Fund (IMF) forecast as evidence. The IMF raised its U.S. growth forecast significantly by 0.6 percentage points, from 2.1% in January to 2.7% in April.

In its economic outlook released last January, the Bank of Korea projected South Korea's annual economic growth rate for this year at 2.1%. However, on the 25th of last month, the first quarter real Gross Domestic Product (GDP) growth rate was recorded at 1.3%, far exceeding expectations. After the first quarter growth rate announcement, Governor Lee hinted at the possibility of an upward revision during a visit to Georgia on the 3rd of this month, saying, "Technically, we cannot avoid raising the GDP growth rate forecast." Indeed, at the Monetary Policy Board meeting on the 23rd, the economic growth forecast for this year was significantly revised upward to 2.5%.

At the press conference that day, Governor Lee said, "Forecasts are not natural science, so it is difficult to predict with accuracy," adding, "When errors occur, it is important to discuss why the differences happened and how policies have changed as a result."

He further assessed that even if forecasts are wrong, it does not reduce trust. Governor Lee said, "Domestic reports sometimes say that statistics should not be released because wrong forecasts confuse the market, but I have never heard such comments overseas," adding, "After announcing growth forecasts, it is necessary to adjust based on how much market disruption actually occurred and how things changed. I do not think that simply being wrong about the forecast lowers credibility."

He continued, "When forecasts deviate like this time, discussing what was wrong and how to improve allows us to identify who the more competent staff members are," adding, "At least during my tenure, I believe it is desirable for the Bank of Korea to provide more communication and information to foster development."