Top down forecasting is the term used in the context of economics. Top-down forecasting is a way to predict what might happen in the future by looking at big-picture information first and then breaking it down into smaller parts. In the case of economics analysts doing top down forecasting first look at the performance of the overall economy then look further into the performance of various industries in the growth of the economy and then finally look into the companies which are doing well in their respective industries. In order to get a better idea about this concept one should look at the advantages and disadvantages of top down forecasting –
Advantage of Top down Forecasting
Macroeconomic Outlook
The first and foremost advantage of top down forecasting is that it gives a macroeconomic outlook or perspective in the sense that it studies the overall performance and behavior of an economy, as opposed to the individual parts that make the economy such as individuals or companies. Hence top down forecasting takes into account factors such as gross domestic product, inflation, unemployment, and trade balances, among others, to provide a comprehensive view of an economy and then drill down further into industries and individual companies.
Better Decision Making
Another benefit of top down forecasting is that it helps in data aggregation which is nothing but the process of compiling information from several sources into a single collection of information. In top-down forecasting, data is gathered at a high level to give a comprehensive perspective of the economy or a specific market. Aggregation aims to preserve a level of accuracy while also simplifying and making the data more understandable. Using this method, it is possible to spot broad trends and patterns that might not be obvious when examining individual data points. Top-down forecasting can aid in generating informed judgments and projections by combining data to give a more complete view of an economy or market.
Simple to Understand
In the complex world, we all crave simplicity and in the case of top down forecasting it is very easy to understand in the sense that this method is a straightforward method and hence requires fewer inputs and calculations compared to other forecasting methods. This makes it accessible and simple to understand even for those individuals who have limited economic or statistical knowledge and hence in a way makes it accessible to a large section of the population.
Disadvantages of Top down Forecasting
Lack of Detailed Analysis
The biggest disadvantage of top down forecasting is the lack of detailed analysis in the sense that while top down forecasting provides excellent analysis of macroeconomic analysis but fails to provide important details and trends at the individual level or company level. This can result in inaccuracies in the forecast, especially in rapidly changing or unpredictable environments. In simple words, just like in the case of movies, a trailer does not tell the story of the complete movie in the same way top down forecasting does not tell the whole story about what’s happening in individual companies.
Lack of Accuracy
In the context of top-down forecasting, lack of accuracy is another limitation of this method. This is because top-down forecasting relies on a number of assumptions about the economy and its components, which may not always reflect the reality of the situation. This can make it less suitable for making decisions about specific projects or initiatives, as the accuracy of the forecast may be limited. As a result, organizations may prefer to use bottom-up forecasting, which provides more accurate data about individual companies or organizations.
Unexpected Events
In case of unexpected events like earthquakes, war, and pandemics the whole forecasting done through top down forecasting can go for a toss because unexpected events can have a significant impact on the whole economy of the country and hence can impact the accuracy of the forecast.
As one can see from the above top down forecasting has pros as well as cons and that is the reason why any individual doing top down forecasting should carefully read the above points and should use other methods of forecasting along with top down forecasting in order to get better results from forecasting.