1. The OECD assessments of the future trends of key macroeconomic variables are better characterised as conditional projections rather than forecasts, since they are conditional on a set of technical assumptions about macroeconomic policies, nominal exchange rates and the path of oil- and non-oil commodity prices. Thus, the OECD projections provide answers to questions like:’What is likely to happen in country X if the government maintains the current set of macropolicies?’ or, ‘On present policies, what kind of imbalances or pressure points are likely to develop over the next two years e.g. in the form of rising inflation, widening current account imbalances or higher unemployment?’ This in turn helps to identify potential problems in the economy and to foster a debate among policy makers about what can be done to achieve better outcomes.
2. The OECD projection process is also unique in the way it insures that projections are consistent at the world level. First, consistency is sought through the OECD’s ‘internal’ production process. The twice-yearly forecasting exercise starts with a broad exchange of views among OECD country experts and topic specialists. This provides a consistent starting point for the global outlook and its potential interactions with individual country projections through trade and financial linkages. Second, international consistency is ensured via a predetermined iteration process feeding through the OECD’s INTERLINK world economic model, and by discussions between country and international trade experts.
3. There is a built-in ‘reality check’as the OECD benefits from the participation of government experts and policy makers in arriving at its projections. The OECD holds extensive discussions on the projections and related analyses with member country government experts and policy makers. The OECD meets with government economic forecasters to test its tentative conclusions against their knowledge of local conditions. The main lines of the Economic Outlook projections and analysis are presented to, and their policy implications discussed by, the OECD Economic Policy Committee, which is composed of senior officials from finance or economic ministries and central banks. Finally, country expertise is drawn from the surveys of member country economies published regularly by the OECD. All member countries participate in the production of their own as well as other countries’ surveys. This produces a body of knowledge on these economies that is continuously tested in discussion and debate with member country economists and policy makers.

Who is responsible for the projections and analysis?
The discussions between the OECD and national policy makers are valuable because they harness Member countries' knowledge and expertise. However, while being given due consideration, comments and suggestions from Member countries are not automatically reflected in the final version of the Economic Outlook. In the end, the published projections and analysis reflect the independent assessment of economic conditions in the world economy by the OECD staff economists. The Economic Outlook is published under the responsibility of the Secretary-General.

Are OECD projections accurate?
OECD projections are just that, projections and not predictions. Analysis enriches the projections and provides a framework for evaluating outcomes and recommending policy changes. As to the risks, analysis can only point to them, it cannot say precisely which ones will occur or when. Economics is not an exact science. It deals ultimately with human behavior, which changes based on experience and expectations. And it must strive to adapt as economies and economic systems evolve. The OECD regularly reviews its projections for accuracy. A main purpose of these reviews is to isolate whether errors are due to data revisions, to the non-realization of underlying assumptions or to judgmental mistakes about economic conditions and forces shaping the outlook. Indeed sometimes projections show current policies leading to unsatisfactory outcomes, which may lead to policy changes, in turn showing up as (desirable) projection errors. Large projection errors typically occur around major turning points in economic activity. The reasons for this are subject to debate. They may be due to lapses in judgment or a decline in the predictive power of the information available at cyclical turning points.

What are the critical variables and relationships?
The performance of an economy reflects the interaction of many economic variables and underlying relationships. The main economic relationships examined may be summarised as follows:
 
DOMESTIC EXPENDITURE
Projections of private consumption typically take into account real disposable income, household wealth, changes in the rate of inflation, monetary and financial conditions, and leading indicators of consumer confidence and retail sales. Business fixed investment is mainly assessed in relation to non-financial indicators (sales, output and capacity utilisation) and financial variables (cash flow and interest rates). Business survey information is also taken into account. Projections for residential construction take account of demographic trends, housing stocks, real income and financial conditions, and also draw on cyclical indicators for the construction sector. Projections of stockbuilding are usually made with reference to relevant stock-output and stock-sales ratios.

EMPLOYMENT, WAGES AND PRICES
Employment and other labour market trends are generally assessed on the basis of actual and projected output. Important additional elements relate to productivity trends, capacity constraints and costs. Unemployment rate projections are derived from employment and labour supply projections, with the latter assessed on the basis of demographic trends and participation rate assumptions. Wage and earnings assessments take into account a number of key factors, such as the pattern of current wage settlements data as a leading indicator. Labour market demand pressures, productivity rates and the terms of trade also influence the overall projection for real wages and real compensation per employee. The assessment of domestic prices and inflation trends depends crucially on unit costs, the strength of demand and output gaps and foreign prices.
 
OUTPUT GAPS
The output gap is measured as the percentage difference between actual GDP in constant prices and estimated potential GDP. Output gaps are difficult to estimate and subject to margins of substantial error. Potential output is based on a production function approach, taking into account the capital stock, changes in labour supply, factor productivities and underlying "non-accelerating inflation rates of unemployment" (NAIRU) for each Member country.

FOREIGN TRADE AND BALANCE OF PAYMENTS
Particular attention is given in the forecasting exercise to ensuring the consistency of international trade volume and price projections, since trade represents a principal channel through which developments in one country affect other economies. The initial projections for aggregated import volumes of goods and services are derived from activity (expenditure) and lagged competitiveness positions. Aggregate goods and services export volume projections are based on developments in export markets and competitiveness positions. Projections for export prices (deflated for goods and services as measured in national account basis) are based initially on movements in unit labour costs, import prices, and competitors’ export prices while import prices are derived as weighted averages of foreign costs and domestic prices. Investment income receipts and payments reflect returns on stocks of external assets and liabilities.