The economy’s potential may be a little lower than we thought
By Stephen Gordon - Friday, April 19, 2013 - 0 Comments
The Bank of Canada’s forecasting model (or rather models — Bank staffers use more than one when putting their projections together) has a built-in stability property: projections for GDP eventually return to potential, that is, a level consistent with no inflationary or disinflationary pressures. That was the case in the projections in the January Monetary Policy Report and again in the April MPR. It means that when short-term growth projections are revised down — as they were in January and in again in April — forecasts for growth rates a year or two out are simultaneously revised up so that the economy still reaches potential in the medium term.
But there was an interesting feature of the April MPR that I haven’t seen anyone mention: one of the Bank’s better-known estimates for capacity output was revised down in April, reflecting historical revisions. Current estimates for potential output for the third quarter of 2012 are 0.25 per cent lower than they were in January. So even though the new set of projections still shows convergence to potential in the medium term, this convergence occurs at a lower potential output trend:
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How the BoC revised its growth forecast down—and up
By Stephen Gordon - Thursday, January 24, 2013 at 8:50 PM - 0 Comments
(Chris Wattie/Reuters)
They key elements of the Bank of Canada’s Monetary Policy Report (MPR) that was released yesterday are by now well-known: growth in the second half of 2012 was weaker than expected, and the growth of consumer and mortgage debt has slowed. Put together, the two developments mean that whatever date the Bank might have had in mind to start increasing interest rates, it’s been put off. Again.
But there are another couple of points that don’t seem to have received much attention:
- Estimates for GDP in the first two quarters of 2012 were revised downwards. The data available to the BoC when it was preparing its October 2012 MPR showed an annualised growth rate of 1.9 per cent in the first half of 2012. These estimates were then revised downward in the November national accounts release: the most recent data now suggest that GDP grew at an annualised rate of 1.7 per cent.
- The Bank’s projection for the next two years tell remain fundamentally the same. Yes, the GDP estimate for the fourth quarter of 2012 (in the jargon of forecasting, this is a backcast — events that have already occurred, but for which definitive data are not yet available) has been sharply reduced, but the growth projections for the first two quarters of 2013 have been revised up. The Bank’s position is that much of the recent economic weakness is due to to transitory factors and that GDP growth will catch up to to the path the Bank was originally expecting for 2013.
The graph below charts the projections for GDP growth from the last two MPRs. The solid lines are the data that were available when the projections were made, while the dashed lines represent projections.
Given the lags with which monetary policy operates, current decisions about monetary policy are being made with an eye to projections for the latter half of 2014. Both the October and January MPRs have GDP reaching the Bank’s estimate for potential GDP by the end of 2014, so the essential strategy is the same: the next interest rate change will be an increase, although the timing of that increase has been deferred. -
Your guide to the Monetary Policy Report: A cheat-sheet
By Erica Alini - Friday, October 26, 2012 at 6:00 PM - 0 Comments
The Bank of Canada released its quarterly Monetary Policy Report this morning. Here’s what you need to know.
GLOBAL ECONOMY
U.S.:
the economic expansion in the United States is progressing at a gradual pace (…)
The Bank estimates that QE3 will lift the level of U.S. GDP by 1.3 per cent by 2014 and, more broadly, boost global economic activity, increasing the demand for Canadian exports and supporting commodity prices. (…)
Relative to the July Report, U.S. GDP growth in 2013 and 2014 has been revised up to 2.3 per cent and 3.2 per cent, respectively, owing to a larger policy response by the Federal Reserve than was previously expected.
