MACROECONONOMETRIC

FORECASTING

ECON4490 - T12
Seth, Heena, Ayesha

1
AGENDA
Variables of interest
Global Outlook
Geopolitical Uncertainties
Canadian Outlook
Global economies
Vector Autoregressive Model
Growing Role of Expectations
Forecasting
Policy Recommendations
Risks
2
 VARIABLES OF INTEREST*

Consumer spending Consumer price index (CPI)

Business investments Output gap
Government expenditure Unemployment Rate
Net exports Gas Prices

*ACKNOWLEDGING THE EVOLVING ECONOMIC

3
CONDITIONS.
 POLICY RECOMMENDATION

• Bank should keep interest rates at current levels • QUANTITATIVE TIGHTENING

for Q4 2023 - Higher for longer

• Raise rates by 25 basis points in Q1 2024

4
 GLOBAL OUTLOOK

Risk of Global Recession Rises Amid Simultaneous Rate Hikes around the globe- World Bank

EURO ZONE slump has adverse global impacts

Gas prices exert a downward pressure in short run but upward pressure prevails as production cuts by OPEC +

Canada is anchored mostly by any positive oil price shocks.

5
CANADA’S TRADE PARTNERS ?
UNITED STATES
• Growth revised up and net exports rose
• Canadian trade surplus widened

China
• Trade growth increased imports by 9.8%
• Real-Estate crisis fueling trade deficit
• China’s Economy Losing Momentum

European Union Source: BoC

• Tighter Monetary Policy impacts
• Sluggish Growth

6
 GEOPOLITICAL UNCERTAINTIES

HAMAS - ISRAEL CONFLICT

• Concerns on gas prices
• Rise in geopolitical tension

UKRAINE - RUSSIA INVASION

• Supply chain shocks
• Impacts on Trade

7
 Page 1 of 1

CANADIAN ECONOMY
PRESE
• Phase ofNT
economic slowdown
• Cautious Consumer Behavior

• Real GDP remains stable.

• Business investment has shown signs of slowing

• Housing markets cooling down.

• Inflation eases but consumer prices continue to edge higher

PROJECTIO Sources: Statistics Canada and Bank of Canada calculations and projections
* Numbers in parentheses are from the projection in the previous Report.

• Canadian inflation is expected to return to the target byNS

2025.

• Consumer spending is expected to be subdued until 2024.

• Business investment is expected to remain weak

• Softening foreign demand - Export growth is projected to stall

• GDP growth is expected to be modest most of 2024.

Sources: Statistics Canada and Bank of Canada calculations and projections
* Numbers in parentheses are from the projection in the previous Report.
8
 Page 2 of 1

CANADIAN ECONOMY
PRESE
• Phase ofNT
economic slowdown
• Cautious Consumer Behavior

• Real GDP remains stable.

• Business investment has shown signs of slowing

• Housing markets cooling down.

• Inflation eases but consumer prices continue to edge higher

Sources: IMF and Bank of Canada calculations and projections

PROJECTIO
• Canadian inflation is expected to return to the target byNS
2025.

• Consumer spending is expected to be subdued until 2024.

• Business investment is expected to remain weak

• Softening foreign demand - Export growth is projected to stall

• GDP growth is expected to be modest most of 2024. Sources: Statistics Canada and Bank of Canada calculations and projections

9
EXPECTATIONS

10
 Page 1 of 1

GROWING ROLE OF EXPECTATIONS

The drivers of inflation have shifted to inflation expectations

Business expect that the higher inflation will persist beyond 2028.
Shows less confidence in bank’s policy

REASONS FOR THE HIGHER EXPECTATIONS:

• High Government Spending
• Strong demand

SOURCE:
IMF

11
 Firms still plan to raise prices more than usual...

Source: BoC

Source: BoC 12
 Growth Outlook: Stable and Slow
• GDP will move up to 1.6% in 2024 then
2.4% in 2025, settle again close to 1
percent.

Figure 1: Forecasted GDP of the Canadian Economy

13
 GRADUAL WALK OF INFLATION

• The forecast suggests that Inflation will

gradually decrease to 2.4% by Q4 2024,
then reach its target 2% by mid 2025.

Figure 2: Forecasted Inflation of the Canadian Economy

14
RISKS.....

Main upside risks- elevated inflation expectations, businesses slow to

change pricing behaviour, the war in Israel and Gaza could disrupt global
oil supplies, supply chains.

Main downside risks- lower consumption spending than projected, slower

business activity than expected, weaker global demand

15
 POLICY RECOMMENDATION
• Bank of Canada should maintain the interest rates for the next year and increase it by
25 basis points at the end of first quarter 2024

• This way we should at the most face a very mild recession

• A restrictive monetary stance is considered likely to move inflation back toward the target by
the end of 2025

• Continue with Monetary Tightening to constraint liquidity

16
DATA SOURCES:

THANK YOU
FOR LISTENING

17
Seth, Heena, Ayesha
 ECON4490 - T12

APENDIX

Seth, Heena, Ayesha

 CANADIAN MARKET STRUCTURE

HOUSING MARKET LABOR MARKET

• Limited Housing Supply • The current condition.

• High Interest Rates • what is expected to happen?
• Decrease in the number of listings

FINANCIAL MARKET CORPORATE PRICING

• The current condition. • Assumption of Constant Prices - Doesn't hold
• what is expected to happen? • a few more relevant points
APPENDIX
 INTERNATIONAL TRADE
CANADA, AS A SMALL OPEN ECONOMY, IS HIGHLY DEPENDENT ON INTERNATIONAL
TRADE. GIVEN ITS RELATIVELY SMALL DOMESTIC MARKET COMPARED TO LARGER
ECONOMIES, CANADA RELIES SIGNIFICANTLY ON EXPORTS AND IMPORTS TO DRIVE ITS EXPORT BY TRADE PARTNER, 2022
ECONOMIC ACTIVITY.

how is the trade balance doing and what is expected to happen in the coming year?

how is the trade relations with mainly china and us going?

look at the economic conditions of china and us. this will give and idea on what will be the outcome for
canadas trade as well. For instance China is doing bad and this could be a trigger for prices changes in
canada.

find points to tie up to the policy recommendations. like for example, the price of the oil is predicted to
stay high throughout 2024 and this will increase the headline inflation rate but the core is forecasted be
lower and stable, the interest rate of the bank is currently at 5% and looking at the above scenario, there
could be a reason to bring down the interest rate a bit lower in the next Quarter since there are concerns
about economic growth, employment, and potential negative impact of high interest rates on borrowing
and spending.

but at the same time If the bank believes that the high headline inflation is temporary and that core
inflation will remain stable, it may choose to maintain the current interest rate while providing guidance
on its future stance.

DATA SOURCE: STAT CAN

 Canada's Trade: U.S. Surplus Grows, China Deficit Widens, Real Estate
Impact....

• 2.6% increase in exports to the United States

• 1.7% increase in imports from the U.S. (growing demand for U.S. goods
in Canada)

• Widening trade surplus with the United States for the third consecutive
month, reaching $11.7 billion in September.

• Widening trade deficit from $8 billion to $9.7 billion in the same month Source: BoC
(Canada is importing more from China than it is exporting)

A weak Chinese real estate market will affect sectors that export goods and services to China.
 MODEL AND WHY THE MODEL?

• Exploratory Examination

• Differencing for Stationarity

• Identification of Components
• Diagnostic Tests
• Establishment of Model Order (p, d, q)
• Model Adequacy
• Tests for Residuals
• Multiple Model Evaluations

• Out-of-Sample Estimation

• Forecast

• Iterative Refinement
EVIDENCES

Source: IMF, BoC

 REFERENCE:
• BoC- Consumer Expectations survey: https://www.bankofcanada.ca/publications/canadian-survey-of-consumer-expectations/
canadian-survey-of-consumer-expectations-survey-data/
• Corporate profits have contributed disproportionately to inflation: https://www.epi.org
• BoC - International Portfolio Rebalancing and Fiscal Policy Spillovers:Add a subheading
• Identifying News Shocks from Forecasts, September 2023, International Monetary Funds: wpiea2023208-print-pdf.pdf
• How to Improve Inflation Forecasting in Canada - IMF Working Paper: wpiea2019190-print-pdf.pdf
• Estimation of VAR models: ECO_2011_30.pdf
• World Economic Outlook IMF: https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-
october-2020

FIND THE CODES USED HERE: https://github.com/SethCodesABitForSchool/Preliminary_Forecast_Presentation