• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

Penpoin.

Better Knowledge. Your Insight Is Sharper

  • Business
    • Starting Business
    • Managing Business
    • Growing Business
  • Investing
    • Investing Fundamentals
    • Investment Options
  • Economic Context
    • Microeconomics
    • Macroeconomics
    • International economics
Home › Grow Your Business › Marketing and Sales

Economic Forecast: Meaning, Why it Matters, Methods

January 21, 2025 · Ahmad Nasrudin

Economic Forecast Meaning Why it Matters Methods

Contents

  • Why are economic forecasts important?
  • How to do economic forecasting 

What’s it: An economic forecast is a prediction of future economic conditions. This is usually for key economic variables such as economic growth, inflation, interest rates, exchange rates.

Why are economic forecasts important?

First, companies use them as input in developing strategies and other business decisions. Economic forecasts are useful for planning future production, expansion, or budgeting.

For example, a company might be interested in growth in the next year to estimate sales volume. If the economy is growing high, the prospect of demand should remain high because households have plenty of money to spend on goods and services. Thus, management may be targeting a higher sales volume.

Conversely, if economic growth contracts next year, household demand will weaken. Consumers spend less and save more. Because of that, management set pessimistic targets.

In general, economic forecasts are part of planning for the future. This is essential information in managing any company. The long-term success of any company is closely related to how well management can predict future conditions. That way, they can develop appropriate strategies to deal with threats and exploit opportunities in the future.

Economic variables have an impact on business performance:

  • Economic growth affects employment and household income. It ultimately affects the demand for goods and services.
  • Interest rates affect the cost of raising funds. If the interest rate is high, the company bears a higher cost of funds when issuing debt securities. Conversely, a reduction in interest rates lowers funds’ costs and makes investing in capital goods more feasible.
  • High inflation weakens household purchasing power. Prices of goods and services go up. Households get fewer items for the same amount of money.
  • The exchange rate affects the prices of exported and imported goods. The depreciation of the domestic currency makes imports of raw materials and capital goods more expensive, increasing production costs. On the other hand, export products are becoming more competitive in the international market because they are cheaper for overseas buyers. That should increase exports.

Second, policymakers want to know the economic forecast for economic growth and inflation. Forecast results are useful as input for decision making related to fiscal policy and monetary policy.

How to do economic forecasting 

There are many forecasting techniques available. And, they fall into two categories:

  • Qualitative
  • Quantitative

Qualitative forecasting techniques use subjective judgments instead of specific statistical methods. It is useful when historical data is unavailable. We can rely on the judgment of experts in the appropriate field to produce estimates.

Meanwhile, quantitative forecasting methods rely on statistical methods. It is useful when historical data is available. Various statistical methods are available for forecasting and are usually divided into:

  • Forecasts use historical data as predictors
  • The forecast uses other variables as predictors

The first type uses the past trend of a particular variable to estimate its value in the future. We call this time series analysis. For example, you can use past economic growth trends in the last decade to predict the numbers for the next year. The most common method is the Autoregressive Integrated Moving Average (ARIMA).

Then, you can also predict a variable using other variables as predictors. For example, to predict interest rates for the next year, you might use the inflation rate, economic growth, and exchange rates as predictor variables.

If you might use a single point in time, it is what we call cross-section analysis. The most common technique is regression. For example, for the forecast of interest rates in 2019, you use the assumptions for the inflation rate, economic growth, and the exchange rate in 2018.

Alternatively, you can also combine time series analysis and cross-section. That we call panel data analysis (longitudinal analysis). For example, for the forecast of interest rates in 2019, you use panel data regression and use inflation rates, economic growth, and exchange rates over the past two decades as predictors.

No related posts.

About the Author

I'm Ahmad. As an introvert with a passion for storytelling, I leverage my analytical background in equity research and credit risk to provide you with clear, insightful information for your business and investment journeys. My expertise also extends to Wellsifyu.com, where I empower you with smart shopping insights. Learn more about me

TRENDING

  • Positive and Negative Effects of Industrialization
  • Yield Curve: Shape, Factors, Implications, and Strategies for Your Portfolio
  • Government Intervention: Examples, Reasons, and Impacts
  • Business Size: How Business Scale Shapes Success (Importances, Measurement, Classification)
  • Span of Control: Importance, Types, Advantages, Disadvantages
  • Centralized Organizational Structure: Advantages, Disadvantages
  • Public Sector: Roles, Types of Organization, Pros, and Cons

LATEST

  • Key Factors to Consider Before Investing In Fixed-Income Securities
  • 4 Risks Associated with Fixed-Income Investments
  • 4 Benefits Investing in Fixed-Income Securities
  • Decoding the Modern Fixed-Income Market: A Guide for Investors
  • 4 Essential Fixed Income Terms You Must Know
  • Popular Types of Fixed-Income Securities
  • What Makes an Investment “Fixed Income”

FIND OUT MORE

CATEGORIES

Economic Context Fixed-Income Investing Grow Your Business Investing Fundamentals Investment Options Manage Your Business Start Your Business

Primary Sidebar

TRENDING

  • Positive and Negative Effects of Industrialization
  • Yield Curve: Shape, Factors, Implications, and Strategies for Your Portfolio
  • Government Intervention: Examples, Reasons, and Impacts

LATEST

  • Key Factors to Consider Before Investing In Fixed-Income Securities
  • 4 Risks Associated with Fixed-Income Investments
  • 4 Benefits Investing in Fixed-Income Securities

Copyright © 2025  ·  Contact Us  ·  About Us  ·  Terms of Use  · Privacy Policy and Disclaimer  · Affiliate Disclaimer·  Comment Policy