Forecasting BC Economic Growth

Colin Hansen's Merry Band of Forecasters (eg. the BC Forecast Council) have revised their outlook for the BC economy in 2009 from real growth of 2.8% (Sept Vintage) to just 1.3% (November update).

Forecasting provincial growth is complicated by the fact that data is only available on an annual basis, which makes capturing the dynamics a little tricky. A model I have had some success with is a simple error-correction model with growth anchored to a trend with first differences in Canadian real GD, and global commodity prices. As shown in the figure, it provides a pretty decent in-sample fit.

In this framework the path of BC GDP growth will depend on the following factors:

1. BC Output Gap

Measuring potential output is imprecise at best but should be done using a production function approach. However the Bloated Hoarders of Valuable Information want a lot of money for capital stock data and I don't have a lot of free time so we'll have to leave that exercise for a later post. Therefore, I've taken the common approach of applying a Hodrick Prescott filter to BC real GDP. Using the filtered trend as a measure of potential output (or trend output if you find the atheororetical nature of the HP filter offensive), the BC economy has been operating well above trend for the last few years. I’d guess that in 2008 the economy fell below trend which would imply that the economy, all else equal, would be pulled up towards trend/potential.

2. Commodity Prices - After an incredible run, the price of practically every energy and industrial commodity has cratered. Witness the decline in the Scotiabank Commodity Price Index. The IMF projects that commodity prices are likely to fall 5% in 2009 -which to me sounds a little optimistic, but I’ve used it in the base

line scenario.

3. Canadian GDP Growth

Forecasts for the Canadian economy in 2009 are for growth at between -0.8% and 1.3 % - also likely too optimistic (I’ll discuss this more in a subsequent post). I would guess that BC would grow at a faster pace given its lower exposure to the United States and stimulus from the 2010 games.

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Inputting these scenarios into my preferred forecast model returns a real GDP forecast for 2009 of 0.90% for 2009. However, stimulus from VANOC games preparation spending should generate an additional 0.4-0.5% growth. Therefore, I’ll go out on a limb and say that growth will land in a range of 1.3%-1.4% - about the same conclusion as the Merry Band of Forecasters - not sure if that inspires more confidence or less in my estimate, but I guess we’ll know for sure around this time next year. Stay tuned.

This is totally going on my blog...

First a note about this blog: As the subtitle implies, I've started this blog in the hope that it will act as a device to flesh out and organize my own ideas about economics and to aid in learning some new tricks. Doing so with an audience, even if that audience is limited to my wife and bored friends and family, will help provide some discipline. Second, there is a paucity of quality Canadian economics blogs. One is the excellent Worthwhile Canadian Initiative, I can't think of any others. My hope is to approach their level of quality, but I expect to fall woefully short.

What you can expect to find here - macroeconomic analysis of the Canadian and US economies. I'm hoping to start a forecast log to keep track of my own predictions, but that project is still under development. My interests are mainly monetary policy, exchange rates and financial markets, and so that is likely what i'll be posting about.

Lastly, I realize the best blogs are ones that have frequent new material and so I'll do my best to post as often as possible.

On with the show!