2023 will be a difficult year for the Peruvian economy due to two factors: on the one hand, the evolution of the global economy and on the other, internal political uncertainty. Experts see growth fluctuating between 1.9% and 2.5%, with inflation of roughly 5% and an exchange rate of less than 3.90 soles per dollar. Although four months have passed, it is still difficult to see how we will be at the end of the year.
However, beyond believing or disbelieving, the first thing we need to do is answer the following question: How are predictions made and why do they usually fail? If so, it is important to understand how it is projected into the economy.
We all want to know what will happen in the future. This is the natural state of man. And, somehow, we all think about it. Imagine a doctor about to operate on a patient. Can you confirm that everything will be alright? Within certain limits, yes, because before it does a series of analyzes that provide a level of protection, it’s not really total. It happens because unexpected events can happen during surgery that no one thinks about before.
Now let’s go to the economist. When you are at a meeting with friends, the inevitable question arises: What will the future of interest rates be?, When will it recover?, What will the price of the dollar be in the coming weeks? First, the only certainty is that we do not know precisely. Second, the above doesn’t mean we don’t have an idea, because we live thinking about it. Third, if you ask two economists, one will say it will fall and the other will say it will rise. Fourth, counter-responses deserve explanation.
Economics is not an act of faith or magic. For this reason, economists do not predict because any person’s response in that field is equally valid. What distinguishes economists from other professional analysts? Well, economists plan based on models.
A model is a simplification of reality. First, a relationship must be established between the behavior of the economy and the future evolution of China’s development and key variables that affect its determination, such as the political situation. If we assume that the Chinese economy will grow at around 5%, as is happening now, and that the political situation will be the same as it is today, the Peruvian economy will behave in a certain way.
However, there are other important variables such as the evolution of the Federal Reserve interest rate or the possible appearance of an El Niño event. In this way, the eventual expected behavior of key variables is listed which, in the opinion of the forecaster, will determine the performance of the economy. If there are several, in the opinion of the projector, the most suitable ones are taken into account and are assumed to act in a certain way. And with that we plan.
It is important to understand that predictions depend on starting assumptions. If we assume that China is growing, there will be no El Nino phenomenon, the political situation will continue with its “constant instability”, and the exchange rate will be between 3.70 and 3.90 feet per dollar, the resulting economic growth will be 1.9% to 2.5%.
Note that this is not a puzzle and the projection will always have flaws because an assumption is not met for the result to be different. Therefore, economics is not a faith but a science. The more true the assumptions, the better the prediction.
Roberto Pereira on Congress and Freedom of Expression