How the BoC revised its growth forecast down—and up -

How the BoC revised its growth forecast down—and up

Stephen Gordon puts the January Monetary Policy Report under the lens


(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:

  1. 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.
  2. 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.


How the BoC revised its growth forecast down—and up

  1. The BOC has no more idea of what it’s doing than the govt does.

    Low interest rates….so people aren’t investing, austerity as the totally wrong direction, and stimulation apparently involves gazebos…..not bridges and highways.

    Flipping a coin is what they’re doing. Hoping something works.

    • Low interest rates encourage investing over saving because the return on savings is low.

      Usually a recovery is brought about by low interest rates because the low cost of money makes it attractive for businesses to invest which creates economic activity and jobs.

      The reason businesses and investors are hoarding money and buying gold is because they have no faith in the recovery. They are especially spooked by inflation targeting, believing the central bank will raise interest rates prematurely and kill off the recovery (and the return on their investments.)

      We are essentially caught in a liquidity trap, where the interest rate required to spur a recovery is below zero. Economists like Paul Krugman argue that the inflation target must be raised to prevent hoarding and that fiscal stimulus must accompany the monetary.

      • Low interest rates are great for a borrower, lousy for an investor.

        And gold is only good for jewellery.

        • When low interest rates spur a strong recovery they create a bull stock market which is great for investors. We are in a crisis now, where investors are getting lousy returns on savings and investments, and the economy is going nowhere.

          Hoarders basically expect deflation, which means they end up in a stronger position getting no nominal return on their money because deflation will increase its real value. A higher inflation target would discourage hoarding because investors would see the real value of their money erode. Money put into the economy would create wealth, jobs and strong returns on investments in a virtuous cycle.

          When the economy is fully recovered and begins to overheat, the central banks can raise interest rates back up to normal levels and have room to stimulate a future economy in recession.

          • Most people….wisely….stay out of the stock market.

        • You think investors don’t borrow?

  2. The most interesting thing about these forecasts is that Kevin Page turned out to be right. He originally forecast 1.9% in 2012, while Carney originally forecast 2.4% (later revising it down to 2.1%.)

    Page factored austerity measures into his numbers.

    But clearly, the BoC might as well try and predict what the weather will be like in 2014 — it will have better odds than getting GDP growth right. We could very well be in recession by then.

    Budget watchdog accused of being too pessimistic