Saturday, January 31, 2009
(Click to enlarge)
I was surprised by the better than expected Q4 GDP in the US (if you can put a positive spin on the biggest contraction since 1982). Real GDP came in at -3.8% vs expectations of -5.8%. Barry Ritholtz points out that much of the upside surprise came from higher than expected inventories. Higher inventories in Q4 should mean production cuts shifting into 2009 and therefore even weaker growth in Q1.
Not good times - bad times.
I'm hoping to post a revised Canadian forecast later today to reflect the released budget and incoming Q4 data. Stay tuned.
Tuesday, January 27, 2009
Infrastructure spending: I can see Stephen Gordon's point - but I still think that infrastructure spending will provide some stimulus - and at least maintain demand for, if not create, construction jobs.
Access to Credit: $5 billion to the BDC, EDC to keep credit flowing to viable small businesss seems like money well spent. The additional $50 billion for the Insured Mortgage Purchase Program to purchase mortgage backed securities from banks is also a good idea.
Tax Cuts: meh - I'm sure I could find a lot of "middle-class" people that make over $80K. Hopefully the individuals targeted will spend the extra $200-500 instead of funneling it into TFSAs.
Retraining - not really stimulus, but I think necessary if Ontario is going to finally wise-up about the prospects of its Manufacturing industry.
Political Pandering Masquerading as Stimulus Policy:
Social Housing: This is not politically correct, but to me spending on social housing or housing on reserve land is simply pouring money into what Hernando de Soto termed "dead capital".
$7.5 billion for forestry, autos and manufacturing - rewarding failure and years of underinvestment. Not good use of taxpayer money.
Thursday, January 22, 2009
Few details about the composition of the Canadian stimulus are known, though it was leaked today that the Canadian Government is going to run a deficit of approximately $34 billion for at least two years. A deficit that large amounts to a little over 2% of GDP which is in accord with the general consensus for the recommended size of a stimulus package.
The composition of the stimulus, between spending and tax cuts, may have important implications for a second half recovery - unfortunately, as Nick Rowe points out, there is very little agreement on the effectiveness of spending vs. tax cuts. A recent OECD study by Roberto Perotti, using the SVAR approach of Blanchard and Perotti (2002), revealed that a tax cut in Canada equal to 1% of GDP provides a boost to the economy of about 0.3% after 4 quarters and 1.8% after 12 quarters. However, a 1% increase in Government expenditures actually leads to a small decrease of in GDP after 4 quarters and a cumulative decrease of about 2% after 12 quarters.
Does this mean that there is no room for government spending in the Jan 27. budget? No. Given the state of credit markets and investment conditions, it is unlikely that government investment would be displacing private investment. Moreover, while I would like to see permanent middle class tax cuts compose a significant portion of the budget, the down-side is that we may see much of the tax relief funneled into the new TFSA's - not a bad thing for the long-run but not great as stimulus.
The Government has a very difficult task ahead, lets hope they get it right.
Tuesday, January 20, 2009
Saturday, January 17, 2009
For what it's worth, my forecast of GDP and core inflation suggests that a zero target for two quarters is the right policy under a conventional Taylor Rule.
The above path for the overnight rate assumes a significant output gap (>5% in Q12009) and core inflation close to 1%. Alternatively, if deflation is going to a problem, the BoC should go to zero on Tuesday and start thinking very creatively about how to engineer non-negative inflation expectations.
Friday, January 16, 2009
So what happens now that oil has fallen to $40? A (very) simple model of the elasticity of energy exports with respect to a one quarter lag of the price of crude oil (I know we export more than oil, but I already told you the model was simple) suggests that energy exports are about to fall off a cliff.
Look out below!
Tuesday, January 13, 2009
As shown in the table, I am forecasting that the economy will be in recession for at least 3 quarters, from 2008Q4 to 2009Q2 with a real possibility of the recession extending into 2009Q3. Importantly, this forecast assumes government stimulus of 0.5% of GDP in 2009Q3 and 0.5% in 2009Q4 - that is, a stimulus package proposed in the January budget will take several months to impact the economy. This is an entirely arbitrary assumption, but one I can live with. Based on the most common number thrown around in the media I've assumed total stimulus of 2% of GDP, spread equally across four quarters (this is almost certainly wrong but maybe close enough). Without this stimulus, I would project that the recession would last through 2009Q4.
Without further ado, I present the inaugural Shock Minus Control forecast:
So how does my projected 2009 recession compare with past Canadian recessions? If my forecast is close, it should be fairly deep but perhaps not as drawn out as 1981 or 1990:
Sunday, January 11, 2009
Residential and Non-Residential investment in structures is clearly softening. Recent building permit data show declines in permits and housing starts have been trending sharply lower for many months. However, it is not the direct impact of the slowing construction sector that has me concerned - investment in structures is only about 10% of GDP - its the potential impact on employment, and therefore personal consumption, from a slowing construction sector. As Stephen Gordon points out, unemployment in the construction sector is at an all time low and construction currently occupies about 7% of the labour force, well above historical average levels.
Seasonally adjusted construction employment fell by 44,000 jobs from November 2008 to December 2008 - if this trend continues, and I think it will, it will be much harder for the economy to escape with only a short and shallow recession.
Friday, January 9, 2009
If that is true, this may be bad news for North American equity markets
Tuesday, January 6, 2009
Monday, January 5, 2009
It is interesting that the variable that is the hardest to forecast, the exchange rate, has an appropriately large range (78 cents to 94 cents) and that this range is almost identical between groups of forecasters. Moreover, the Banks would seem to be slightly more bullish on growth, hence the BoC target close to 1%, than the bloggers consensus of only about 0.5%. Other than that, it is generally agreed that inflation will be too low and unemployment too high.
Friday, January 2, 2009
1. Unconditional point-forecasts only, for 5 macroeconomic variables: CPI, Unemployment Rate, US/CAN Exchange Rate, BoC Target, TSX (My forecasts are the product of a small-scale model so I'll throw in a real GDP forecast as well).
2. Only those who have made a forecast will be allowed to laugh at others' forecasts in January 2010.
3. No prize for the best forecast (other than bragging rights).
4. "Best" forecast is defined as that which minimises the following loss function:
Loss = sum of absolute value of [(forecast-actual)/latest available end of 2008 actual].
Here is what I think is in store for 2009:
CPI Inflation: 0.6%
Unemployment Rate: 7.1%
US/CAN Exchange Rate: 94 cents (with bias downward)
BoC Target: 0.75% (just to be different)
Real GDP Growth: -1.7%
That was fun, great idea guys!