deterioration in investor sentiment could disrupt financial markets and present a downside risk to global growth.

As a robustness check, the constant OLS-derived weights proposed by Kannan and Elekdag (2009) are estimated (Figure 3). The OLS-based approach produces a smaller variance of global growth forecast than the VAR approach. This reflects the presence of other risk factors that are not captured in the OLS estimates of Kannan and Elekdag (2009) but are important residual terms in the VAR estimates.

From the fanchart, the cumulative density function of global growth can be derived. Based on this, the probability of growth falling below any threshold can be calculated (Figure 4). Some of the downside risks have materialized between the January and June forecasts, resulting in forecast downgrades for 2016 and 2017. That said, the probability of global growth being 1 percentage point lower than currently projected in 2017 remains around the average for the decade (19 percent as of May 2016), still well below the probability in 2008 on the eve of the global financial crisis (26 percent).<sup>13</sup> The probability of growth falling to or below 1 percent (the growth rate likely associated with global recession) is somewhat above the 10-year average for 2006-16.<sup>14</sup>

# **5. Conclusion**

A complete assessment of global economic prospects requires baseline forecasts as well as an assessment of risks. The latter conveys to policy makers a sense of the uncertainty prevailing at the time of forecasting, which might vary with incoming data, past forecast performance, and changing expectations. In this working paper, three questions have been addressed:

- What are the selected risk indicators used to assess forecast uncertainty? Three risk factors were chosen for their tight connection with global growth prospects: equity prices, term spreads, and oil prices.  Changes in the distribution of forecasts for these underlying risk factors are mapped into a distribution of risks for global growth.

- How can different risk factors be combined in a single fan chart? Signals extracted from the distribution of individual risk factors are aggregated using weights estimated from a vector autoregression model of global growth on the risk indicators. This approach allows individual risk factors to impact forecast uncertainty and the balance of risks differently at different forecast horizons.

- What is the current balance of risks to global growth? Uncertainty about growth forecasts for 2016 and 2017 is estimated to be near the historical median but has increased since early January 2016, especially for 2017. The balance of risks to global growth forecasts for 2016-17 has tilted further to the downside since January 2016.

Some downside risks have materialized since the January 2016 forecasts. As a result, a forecast downgrade has accompanied rising uncertainty around global growth forecasts and a balance of

> 13 The probability of global growth being 1 percent lower than currently projected for next year averaged 18 percent during 2006 and 2015, peaking at 26 percent in 2008.

> 14 The probability of growth falling below 1 percent is 5 percent, just above the 2006-16 average (excluding the global recession 2009) of 3.5 percent for the current year and 10 percent for the next year.

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