Fan chart

3 Key Takeaways

• A fan chart displays a range of potential future values, highlighting the uncertainty in forecasts.
• It is commonly used in economic and financial contexts to predict variables such as GDP, inflation, or stock prices.
• The chart gets its name from its fan-like shape, created by multiple lines representing different probability levels.

What is a Fan Chart?

A fan chart is a type of data visualization tool used to depict the range of possible future outcomes for a particular variable. It is especially useful in economic and financial forecasting to show the degree of uncertainty associated with predictions. The chart typically features a central line indicating the most likely forecast, surrounded by shaded areas or lines that represent various confidence intervals, creating a fan-like appearance.

The primary purpose of a fan chart is to convey not just the forecasted values but also the associated uncertainty. This allows analysts, policymakers, and investors to better understand the range of potential outcomes and the risks involved. By illustrating the probability of different scenarios, fan charts provide a more comprehensive view of future possibilities than a single-point forecast.

Importance of a Fan Chart

• Visualizes Uncertainty: Clearly shows the range of possible outcomes and the associated risks.
• Aids Decision Making: Helps stakeholders make informed decisions by understanding the full scope of potential scenarios.
• Improves Communication: Provides a clear and concise way to present complex forecast data to a broad audience.

How a Fan Chart Works

Central Forecast Line

The central line on a fan chart represents the median or most likely forecast value for the variable in question. This line is based on historical data and predictive models.

Confidence Intervals

Surrounding the central line are shaded bands or lines that indicate different confidence intervals, such as the 50%, 75%, and 90% probability ranges. These intervals show the range within which the actual value is expected to fall, with the darker shades typically representing higher probabilities.

Time Horizon

The horizontal axis of a fan chart represents the time horizon over which the forecast is made. The chart extends into the future, illustrating how uncertainty increases as the time horizon lengthens.

Examples of a Fan Chart

• Economic Forecasts: Central banks often use fan charts to predict future inflation rates. The central line shows the expected inflation rate, while the surrounding bands illustrate the range of possible outcomes.
• Stock Market Predictions: Financial analysts might use fan charts to forecast future stock prices, showing investors the potential range of stock performance.
• GDP Growth: Economists may create fan charts to predict GDP growth, with the central line representing the most likely growth rate and the surrounding areas indicating different confidence levels.

Real World Application

• Bank of England: The Bank of England frequently uses fan charts in its Inflation Report to illustrate the range of possible future inflation rates. This helps communicate the uncertainty inherent in economic forecasting to policymakers and the public.
• International Monetary Fund (IMF): The IMF employs fan charts in its World Economic Outlook to present forecasts for global economic growth, providing a clear visual representation of potential economic scenarios.
• Corporate Planning: Companies use fan charts to forecast future sales and revenues, helping them plan for various outcomes and manage risk more effectively.