If the GDP misses forecasts, don’t blame the economists, new study says, blame Ottawa

OTTAWA – If you had to create a bet how Canada’s economy was going to fare later on, you’d be better off putting your money on private-sector economists’ predictions than the forecasts from the authorities.

It seems non-governmental forecasts for nominal growth going back a lot more than 20 years – and used as a guide for Ottawa’s budget planning – have been pretty close to spot on, according to a new study.

Research by Scotiabank Economics tries to answer some nagging concerns about private-sector forecasts utilized by the Finance Department for budget planning, including whether these estimates are “steadily bad.”

The short response is they are not. Government padding of non-public consensus forecasts is much more likely the main reason those predictions don’t bear out.

“There is enormous leeway in how Finance’s budgetary projections can unfold in ways that are fully divorced from what economists predict may happen towards the economy,” the report states.

In this case, the research looks only at nominal gdp – a reading that usually comes in greater than real GDP, which takes inflation into account.

The federal budget includes an annual $40-billion “adjustment” in the growth forecasts. In the budget released Tuesday, for instance, the nominal GDP utilized by the government is $1,996 billion – $40 billion less than the average private sector economic forecast.

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“Using private-sector forecast inputs to guide budget planning is a practice that’s been in position since 1994 consistent with best practices internationally, and thus we’ve over 2 decades of forecast performance that people can assess,” Scotiabank says.



So, exactly how often did these private sector analysts over-estimate economic growth by $40 billion or more? Just once in 22 years, based on the study. But that miss “was a doozy,” with a $66 billion “swing and a miss to the downside” – understandable, perhaps, trained with came in 2009 when the country was still being in the so-called “Great Recession.”

“Governments are naturally more concerned about downside risk – blame the economists – than good news – take credit,” the report says. “The forecast misses nevertheless don’t always work to the down-side of projections.”

For example, actual growth beat forecasts by $40 billion or even more in 1999, 2000 and 2002. Put another way, the economy outperformed estimates by two percentage points or more in 1994, 1999, 2000, 2001, 2002 and 2004.

“So there has been more periods when actual growth exceeded forecasts with a fair margin than many years of disappointment,” says the study, that was done “simply to provide a historical perspective around the private sector input into the federal budget.”

The moral of the story? “Quit blaming economists,” Scotiabank offers.

“There is enormous leeway in how Finance’s budgetary projections can unfold in ways which are fully divorced from what economists predict will happen towards the economy.”

This includes spending beyond what was forecast inside a given budget, “and hence outside of what can be assessed by means of forecast accuracy.”

It’s too soon to judge this week’s budget – the first Liberal fiscal plan since 2005, when Paul Martin was prime minister and Ralph Goodale held the Finance portfolio.

But Prime Minister Justin Trudeau’s 2016 fiscal document forecasts total expenses of $317.1 billion – 14.6 per cent of the adjusted nominal GDP – and a $29.4-billion deficit. Although time may look like it falls within the the $40-billion margin of error built into the GDP forecast, Avery Shenfeld, chief economist at CIBC World Markets, says not too fast.

“Instead of doing $40 billion worse compared to consensus (as projected within the budget), let’s imagine you probably did $50 billion better than the consensus on GDP, you would possess a balanced budget in the fifth year,” he said.  “The bottom line is, if the economy does much better than what economists expect over the next five years, you could conceivably possess a budget in balance within the fifth year.”

Financial Post

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