[Column] Criticism That 'Bank of Korea Failed in Its Forecast' Is Actually an Opportunity

"There are criticisms that the Bank of Korea (BOK) has effectively failed in its forecast as the preliminary GDP growth rate for Q1 significantly exceeded expectations." (Reporter)

"Of course, we need to find areas for improvement. However, this time we revised the growth rate by 0.4 percentage points, and such revisions are quite common. Forecasting is not a natural science, so it is difficult to predict accurately. What is important is to discuss why the errors occurred and how policies should be adjusted when discrepancies arise." (Lee Chang-yong, Governor of the Bank of Korea)

When the preliminary Q1 growth rate (1.3%) more than doubled the previous estimate (0.6%), the BOK raised this year's economic growth forecast by 0.4 percentage points last month. Following this, at the press conference after the May Monetary Policy Meeting, questions were raised about whether the BOK had failed in its prediction. Contrary to the initial forecast of sluggish domestic demand, private consumption showed unexpectedly strong performance. At the press conference, Governor Lee emphasized that even the International Monetary Fund (IMF) significantly revised the growth rates of the US and Japan, highlighting the difficulty of improving forecast accuracy.

In reality, economic forecasts have methodological limitations that make precise predictions challenging. If, after the forecast is made, the war situation rapidly deteriorates and international oil prices surge, the economy inevitably deviates from the original forecast. Therefore, forecasting institutions develop economic models using big data as references and discuss which variables might affect the economy and to what extent before announcing their forecasts. If variables are missed or their impacts are underestimated or overestimated during this process, the forecast can fail.

Thus, 100% accurate forecasts have inherent limitations. However, when forecasts differ from reality, the consequences can be significant. Economic forecasts are used to determine the direction of future monetary and fiscal policies and provide market participants with hints about future economic conditions. If forecasts are inaccurate, inappropriate policies that are either too early or too late may be implemented, increasing the risk of triggering inflation or deflation. As Governor Lee said, forecasts can be wrong, but it is necessary to guard against the perception that 'being wrong is acceptable.'

Now that the forecast has missed the mark, it is rather an opportunity for the BOK to secure more precise data. Governor Lee mentioned that the unexpectedly strong improvement in Q1 consumption was due to the failure to anticipate the effect of government transfer payments, explaining that this was because of constraints in quickly obtaining data. A BOK official said, "If real-time data on the current economic situation were available when making forecasts, prediction accuracy could improve," but added, "It is practically difficult because data aggregation takes time." Usually, forecasts refer to structured data released by agencies like Statistics Korea, but since physical time is required for aggregation, it is challenging to obtain the latest data.

An official from a forecasting institution explained that to supplement this, "If proxy data that can estimate real-time consumption situations, such as highway traffic volume data or weather data, are referenced, prediction accuracy could improve." The BOK should take this experience as an opportunity to secure more precise data rather than accept the notion that 'forecasts are bound to be wrong.'