Saturday, January 31, 2009

2009 Revision and 2010 Forecast

Posted below is my 8 quarter forecast slightly revised for Q4 economic data and some model tweaks. I still expect 2009 to be quite weak, with average year-over-year growth of -1.3%. Also of note, I am now forecasting 4 quarters of negative growth from 2008Q4 to 2009Q3. If all goes well, the 2009 recession will be followed by a healthy recovery in 2010 with real GDP growth of 2.2% for the year, and over 3% in the second half. This 2010 forecast puts me more in the optimistic Bank of Canada camp than those pessimists at the IMF.

(Click to enlarge)


Nick Rowe said...

I am surprised to see inflation rising so strongly, to be above target by 2009:4. The quarter over quarter inflation figures must be even stronger as well, to turn around that quickly from Y/Y deflation in the fist half of 2009.

Shock Minus Control said...

Nick - part of my ongoing tweaks is finding a better headline inflation equation. Core inflation is modeled to be fairly well anchored to target, actually too well, but my headline inflation equation is set to be sensitive (probably to sensitive) to year-over-year changes in oil prices which I have increasing to around $65 in 2010. I

Its an ongoing project - and with two kids under 3, difficult to bunker and down and fix the kinks.

Any advice on models that best headline CPI?

Shock Minus Control said...

I should note, the core inflation model I'm using looks like this:

core = a*core(-1) + (1-a)core(+4) + b1*ygap(-1) + b2*(d_ygap(-1)) + b3*d(commodity price) + b4*(d(real_CDN/US(-1)) + b5*(d(real_CDN/US(-2)))

Headline is basically core + change in QoQ energy prices. I've tried a few specification, but very few were providing answers I could live with.

Nick Rowe said...

Dunno. What's that (1-a)core(4) term doing? Is that future expected core inflation? It's a long way in the future. My guess is that, since you have the output gap recovering in 2010, and so that will push up core in 2010, the core(+4) term is bringing core back up in 2009.

Inflation too far forward looking??

It would be interesting to see what the Phillips curve looks like in first difference for, Whether it still makes sense.

2 kids <3, ouch!

Phillip Huggan said...

I tend to agree. I don't have a lot of good things to say about Flaherty's fiscal policy but I think his recent optimistic Canada GDP growth projections are more accurate than are the recent IMF's.

Many major Asian countries are contracting. Each nation's "internal trade" is contracting even faster than is trade with the USA. With very basic infrastructure in populous demand in many of these countries, I don't expect internal growth to stall indefinitely. I expect commodities price rises to keep us growing ignoring that GDP doesn't include federal debt/surplus, among other metrics.

Phillip Huggan said...

Nick, women give birth. I doubt it hurts much anyway. Probably like a papercut.

Shock Minus Control said...

Phillip - I find it difficult to model a (realistic) scenario in which the Canadian economy does not rebound beyond trend in 2010. Of course, i could be completely wrong in what i feel is realistic but that's part of the fun of forecasting.

Since my wife is one of my avid readers, I won't comment on who is worse off between men and women when it comes to children.