This from the Monetary Submit confirms planning is just not co-ordinated in any respect and hardly considers black swan occasions.
Monetary Submit FP Posthaste Nov 01, 2024
The third quarter has been an actual thorn within the aspect of the Bank of Canada in relation to attempting to pin down gross domestic product, and the most recent information is just inflicting policymakers extra grief.
Within the central financial institution’s October Financial Coverage Report (MPR), it forecasted third-quarter GDP of 1.5 per cent, a giant drop from its 2.8 per cent estimate in July. After the GDP information launch on Thursday, the central financial institution’s revised estimate for the quarter is wanting like one other overshoot.
Statistics Canada’s flash estimate for September GDP of 0.3 per cent, in addition to zero progress in August and revised 0.1 per cent progress in July, means progress doubtless got here in at one per cent annualized for the third quarter.
“Forecasting is a tough enterprise,” Derek Holt, vice-president and head of capital markets economics on the Bank of Nova Scotia, mentioned in an e-mail. “In equity to (policymakers), they didn’t know once they set the forecasts in July that wildfires and strikes, together with work stoppages at railways, amongst others, would pose as a lot danger to near-term progress.
He mentioned Scotiabank in the summertime had a third-quarter GDP forecast of two.2 per cent again, although the Financial institution of Canada’s estimate “stunned us to the excessive aspect on the time.”
Stephen Brown, assistant chief North America economist at Capital Economics Ltd., additionally cited “non permanent elements” such because the wildfires and railway lockouts for wreaking havoc with the Financial institution of Canada’s GDP projections.
“Though the precise stoppages had been very short-lived, there was nonetheless a giant drop in rail site visitors as exporters didn’t need to danger their merchandise being stranded,” he mentioned in an e-mail.
Capital Economics estimates the wildfires and railway stoppages mixed took a 0.4 share level chunk out of third-quarter progress.
However that’s not all that tripped up policymakers.
Michael Davenport, an economist at Oxford Economics Canada, mentioned the opening of the Trans Mountain Pipeline expansion didn’t ship the GDP increase that the central financial institution anticipated.
“In its July Monetary Policy Report, the Financial institution of Canada anticipated a robust pickup in exports to drive progress in Q3, primarily reflecting a rise in oil exports from the opening of the Trans Mountain Pipeline growth,” he mentioned in an e-mail. “We haven’t but seen proof of a considerable pickup in power exports in Q3.”
Charles St-Arnaud, chief economist at Alberta Central, additionally thinks exports turned out to be a letdown for the central financial institution and its projections, particularly the July MPR forecast of two.8 per cent, which “was a lot larger” than everybody else had.
“We haven’t seen in any respect the extent of exports that the Financial institution of Canada was anticipating,” he mentioned, including that volumes have basically been flat going again to early 2023.
Different areas the place the central financial institution overestimated progress included consumer spending and the real estate sector, Davenport mentioned.
However what, if something, do these misses imply for the Financial institution of Canada’s path on rate of interest cuts?
If policymakers’ expectations for GDP had come nearer to the true numbers, economists don’t appear to suppose interest rates would have come down in bigger increments sooner.
In September, there didn’t but exist a case to “go so shortly,” given what was taking place with inflation, which rose 2.5 per cent yr over yr in August, the newest studying accessible to the Financial institution of Canada for its fee resolution that month, St-Arnaud mentioned.
Holt mentioned the sudden weak point in GDP, which speaks to having “extra spare capability within the financial system than had been forecast,” helped push the Financial institution of Canada to chop by an outsized 50 foundation factors at its rate of interest announcement on Oct. 23. Previous to that, the central financial institution had applied three 25 basis-point cuts beginning in June.
“So, upsizing the scale and tempo of slicing is about getting progress again up as shortly as potential as a way to stem the tide considerably,” he mentioned.
Wanting forward, St-Arnaud mentioned the cuts to immigration levels will quantity to a giant hit on GDP subsequent yr and make the work of forecasting that rather more troublesome.
“The large fall in population growth will actually complicate the work of the Financial institution of Canada,” he mentioned, because it provides volatility in an space usually characterised by stability. “Life is fairly sophisticated proper now and the financial institution’s fashions will not be constructed for these sorts of gyrations.”
