Canadian Economic Forecasts: 2011 revisited

Happy New Year everyone!

Last January we made forecasts for 2011. It's now time to check how well we did. (I will do a separate post for 2012 forecasts).

Well, we all did badly. Even those of us who got some numbers roughly right got other numbers badly wrong. I think that shows that 2011 was a very weird year. I refuse to countenance the possibility that all our forecasts were what was weird, it was reality that was weird.

I hesitate to call BearClaw a "winner" of the contest: just the best of a bad lot of forecasts.

Here's BearClaw's forecast [compared with what actually happened]:

CPI, year over year, November 2011: 1.5%  [2.9%]
Unemployment, November 2011: 7.6%  [7.4%]
Exchange rate, December 31 2011: US$ 0.92 [0.98]
Bank of Canada overnight rate target, December 31 2011: 1.00% [1.00%]
TSX, December 31 2011: 12,500  [11,955]

Spot on for the overnight rate. Paul Friesen also got the overnight rate right, but everyone else predicted a higher overnight rate.

BearClaw did fairly well on the others, but failed badly on the CPI inflation rate, which came in much higher than any of us predicted. The closest were Robert McClelland at 2.6% and Paul Friesen at 2.5%.

I think that's instructive. If you had told us 12 months ago that CPI inflation would be 2.9%, and that unemployment had slowly come down to 7.4%, I don't think any of us would have expected the Bank of Canada would have set the overnight rate target as low as 1.00%. And I think the explanation is mostly that even though total CPI inflation is 2.9%, core inflation is only 2.1%, and the Bank of Canada responds more to core inflation than to total inflation. Plus, world interest rates are still very low, and it's the interest rate differential that matters as much as the interest rate.

My own forecast was badly off. I take some solace in having got this bit at least partly right:

"The Eurozone. I think there's a strong possibility that things will get worse, and for one or more countries to leave the Euro. If that happens there may be a flight to the US dollar, which could weaken the CAD/USD exchange rate below my (rather high) forecast."

So, well done BearClaw! But don't get too cocky!

Comments

[Paul Friesen]

I think you're right about it being a weird year and hard to predict. The main difficulty was that you didn't only have to predict the economics, you also had to predict the politics. The recession could have been ended very quickly, given rational political decisions, but those decisions didn't seem likely to happen and they didn't happen. They don't look likely to happen this year either.

[Paul Friesen]

p.s. your link to last year's post doesn't seem to work.

[tomslee]

Last year's post: http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/01/canadian-economic-forecasts-2011-make-yours-now.html

[tomslee]

Let's try that with a link.

[Stephen Gordon]

Link fixed!

[Stephen Gordon]

And yes, the eurozone and the related, continuing, risk of another financial market meltdown seems to have been the big difference between why the inflation and unemployment numbers are hard to reconcile with the overnight rate target.

[Joe]

Nick,

Doesn't this post contradict your previous post where you criticized the St. Louis and Atlanta feds for "seeing whether core inflation forecasts future total inflation"?

http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/06/no-you-cant-test-whether-core-is-useful-that-way.html

For example, let's say hypothetically speaking we got a list of every single forecast Mark Zandi (or any other professional forecaster) ever made in his life to the markets/public/media/government, and then compared it to what actually happened.... would that be a correct method to determine whether he is a good forecaster?

And if you can judge Zandi or BearClaw that way, then why can't you do the same with core inflation expectations?

Also, not to be that snotty student in the back corner, but how do we know that BearClaw's accurate forecast was a result of skill or just rather blind luck?

Best! Happy new year!

[Nick Rowe]

Joe: yes, it does a bit. But I still think that it's better the Bank of Canada responds to core rather than total, even if the particular method used by those feds to justify that belief doesn't work. It just means I don't have as much evidence for my belief as I would like to have.

There's a difference between how we would evaluate a private sector inflation forecaster and how we would evaluate inflation forecasters that are currently being used by the Bank of Canada. I know that sounds paradoxical. The job of the Bank of Canada is to try to extract all the useful information from an inflation forecaster, so that what remains is useless. Damn! I explained this more clearly once, in one of my old posts. My head isn't working this afternoon. Sorry.

"Also, not to be that snotty student in the back corner, but how do we know that BearClaw's accurate forecast was a result of skill or just rather blind luck?"

We never will. Even if BearClaw gets it right again and again. If you have a million people making forecasts at random, you will still find some of them getting every forecast right time after time.

Ask Stephen! He might give a better answer.

[Paul Rogers]

When do we get the 2012 forecasts? :)

I predict US long rates rise substantially as Euroland cools off, with all the resulting unpleasantness one would anticipate.

Looking forward to yours!

[Mark]

I got housed.