The Case of Serial Disappointment

Justin-Damien Guenette, Nicholas Labelle, Martin Leduc and Lori Rennison

Staff Analytical Notes from Bank of Canada

Abstract: Similar to those of other forecasters, the Bank of Canada’s forecasts of global GDP growth have shown persistent negative errors over the past five years. This is in contrast to the pre-crisis period, when errors were consistently positive as global GDP surprised to the upside. All major regions have contributed to the forecast errors observed since 2011, although the United States has been the most persistent source of notable errors. In turn, the Bank of Canada’s gauge of foreign demand for Canadian exports—the foreign activity measure—has been continuously revised down. Average forecast errors for Canadian GDP growth are also negative over this period, particularly at the one-year-ahead horizon. The most important contributors to this unexpected weakness are exports and business fixed investment, the effects of which were only partly offset by positive surprises on housing. We find that the one-year-ahead export errors can be linked in part to the unanticipated weakness in US growth. Canadian competitiveness may also have been weaker than assumed. The errors on business investment correlate with measures of firm sentiment and uncertainty, as well as with deviations in oil prices from the view in the Bank’s baseline forecast. The possibility that a period of negative surprises in foreign and domestic output growth could continue over the coming years raises important questions for future study by central banks and policy-makers.

Keywords: Business fluctuations and cycles; Domestic demand and components; Economic models; International topics; Potential output; Uncertainty and monetary policy (search for similar items in EconPapers)
JEL-codes: E E2 E27 E6 E66 F F0 F01 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocsan:16-10

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