Economic forecasts are estimates of future economic activity in the overall economy, with a focus on the slowing or speeding up as well as the turning points of economic variables in the course of the business cycle. Economic fluctuations are expressed in terms of the development in real quarterly GDP.
The Ifo Institute forecasts real and nominal GDP in Germany in terms of the demand components, because in matters of economic activity it is not an issue of trend growth, which requires a supply-side explanation, but of the variations around the trend. The forecast distinguishes between the demand of private households, the state, investors (equipment and buildings) and other countries (exports) and takes into account that these demand components are also affected in part by imports. Taking into account the sectoral business surveys (Ifo KT) the forecast is broken down to the major sectors of the economy (IFOCAST). Every GDP forecast is supplemented by an estimate of primary distribution (employee compensation, corporate and investment income) as well as income redistribution by the state. In addition the government account (revenue, expenditure and net lending/net borrowing) is quantified and the foreseeable development on the labour market (number of employees, number of unemployed) is forecast in conjunction with the expected state of economic activity.
Partial forecasts are presented by using the system of national accounts and converted to half-year or yearly values for publication. In a multi-phased, iterative process the partial forecasts of GDP, the labour market and government accounts are tested for their economic plausibility and synchronized with each other until a computationally coherent forecast with the greatest subjective probability is achieved.
The Ifo Institute employs a number of modern methods for forecasting economic activity such as vector autoregressive approaches (VAR models), econometric structural models and trend-cycle decomposition. This ensures that all information efficiently flows into the forecast and that the expert knowledge of the forecaster is adequately incorporated. As a long-standing practice, the Ifo Institute regularly evaluates the quality of its own forecasts of economic activity. It comments on important conceptual changes in the system of national accounts, in which accounting system the Ifo economic forecasts are embedded.
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