Private growth forecasts are mostly right
Non-government predictions used by Ottawa’s budgets are padded by ‘adjustments’
OTTAWA — If you had to make a bet on how Canada’s economy was going to fare in the future, you’d be better off putting your money on private-sector economists’ predictions than the forecasts of the federal government.
It seems non-governmental forecasts for nominal growth going back 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 attempts to answer some concerns about private-sector forecasts used by the Finance Department for budget planning, including whether these estimates are “steadily bad.”
The short answer is they are not. Government padding of private consensus forecasts is more likely the reason those predictions don’t bear out.
In this case, the study looks only at nominal gross domestic product — a reading that often comes in higher 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 example, the nominal GDP used by the government is $1,996 billion — $40 billion less than the average private sector economic forecast.
“Using private-sector forecast inputs to guide budget planning is a practice that has been in place since 1994 in keeping with best practices internationally, and so we have over two decades of forecast performance that we can assess,” Scotiabank says.
So, exactly how often did these private sector analysts overestimate economic growth by $40 billion or more? Just once in 22 years, according to the study. But that miss “was a doozy,” with a $66-billion “swing and a miss to the downside” — understandable given it came in 2009 when the country was still in the so-called “Great Recession.”
“Governments are naturally more worried about downside risk — blame the economists — than good news — take credit,” the report says. “The forecast misses nevertheless do not always work to the downside of projections.”
For example, actual growth beat forecasts by $40 billion or 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.
The moral of the story? “Quit blaming economists,” Scotiabank offers.
“There is enormous leeway in how Finance’s budgetary projections can unfold in ways that are fully divorced from what economists predict will happen to the economy.”
This includes spending beyond what was forecast in a given budget, “and hence outside of what can be assessed by way of forecast accuracy.”
It’s too early to judge this week’s budget — the first Liberal fiscal plan since 2005. But Prime Minister Justin Trudeau’s 2016 fiscal document forecasts expenses of $317.1 billion — 14.6 per cent of the adjusted nominal GDP — and a $29.4-billion deficit.
Although that number may look like it falls within the $40-billion margin of error built into the GDP forecast, Avery Shenfeld, chief economist at CIBC World Markets, says not so fast.
“Instead of doing $40 billion worse than the consensus (as projected in the budget), let’s say you did $50 billion better than the consensus on GDP, you’d probably have a balanced budget in the fifth year,” he said. “The bottom line is, if the economy does better than what economists expect over the next five years, you could conceivably have a budget I balance in the fifth year.”