At this time about a year ago, with the price of oil in a freefall, the state of the economy was troubled. As was the state of economic forecasting: Most of the predictions for 2015 had gone badly awry, and economists and market watchers were getting ready to yank the 2016 outlooks they'd published just weeks before.
This year represented a calming, and a bit of relief for people who believe that there's a process to economic forecasting that is so much more than pulling numbers out of a hat. While the economists at Canada's biggest banks didn't hit every number dead-on, by any means, they got in the ballpark on what would happen in 2016 – particularly once they trimmed their forecasts in the early part of the year.
In some particular economic measures, they were closer than for others (see table, below). The economists were on-target with Canada's unemployment rate, although they overestimated the overall strength of the economy, with every forecast for GDP coming in several tenths of a percentage point below the likely final measure. (Preliminary GDP statistics will come out next year, and can get revised for quite some time after.)
At the same time, it was the most optimistic of the stock-market strategists who were proven right. BMO Nesbitt Burns Inc.'s Brian Belski, who said in 2015 that he saw Canadian equities outperforming the U.S. and the S&P/TSX composite index ending the year at 15,300, may hit that number on the nose depending on how the markets close in the handful of trading days left.
To understand how all these components come together, realize a couple of things: The Canadian economy remains strongly tied to the United States, which explains a portion of Canadian underperformance. And Canadian equity markets aren't as closely linked to the Canadian economy as some other national stock measures.
"If there was a surprise, it wasn't so much Canada being a few decimal places lower, but the U.S. being quite a bit below what was expected," says Avery Shenfeld, chief economist at CIBC World Markets. "And that did show up in Canada in a weaker track for non-energy exports than what was expected. [Canadian] consumers held up reasonably well, but exports were quite soft, and that in part captured the disappointment in first-half U.S. growth."
One of the biggest misses, across the board, was in forecasting the average 2016 rate on the 10-year Canadian government note. For years, economists expecting imminently rising interest rates have been bedevilled as they've stayed at historical lows – or marched even lower.
"It was quite surprising in the middle of the year to have seen Canadian 10-year rates below 1 per cent and U.S. 10-year rates below one and a half," Mr. Shenfeld said. "That certainly wasn't something that we would have thought going into the year. That was miles below. So it wasn't just that U.S. growth disappointed, but that U.S. rates were stunningly low during the year."
Douglas Porter, chief economist at BMO Nesbitt Burns, said Canadian GDP growth would have been a tenth of a percentage point or two higher were it not for the Alberta wildfires. That puts the likely final GDP number in line with what economists predicted in early 2016.
That points to another thing to consider in weighing the forecasters' 2016 precision: The numbers in the accompanying table came from the outlooks the banks published in late November to mid-December. But oil prices were in the midst of a shocking freefall, so much so that Mr. Shenfeld said in December 2015 that CIBC's 2016 forecast of average $50-per-barrel oil was already under review soon after being published. "It wasn't that long into the year that we were pulling that [overall] forecast down. By the spring, we already knew those forecasts were too high."
BMO, Mr. Porter says, chopped its Canadian GDP forecast early in the year to closer to 1 per cent, from the 1.8 predicted a few weeks before. By the time the Canadian government revealed the federal budget in March, he says, the consensus GDP growth forecast among Canadian economists was 1.4 per cent. (BMO and CIBC see the final 2016 number coming in at 1.3 per cent.)
While Canadian GDP underwhelmed, the Canadian stock market did not, with the S&P/TSX composite index up nearly 18 per cent for the year, still ahead of late-gaining, Trump-propelled U.S. equities. There are, of course, some disconnects, with the Canadian markets overweighted to financials, energy companies and minerals. Financials tracks the Canadian economy, but energy and mining stocks rise with commodity prices, and a Toronto-headquartered gold company can see its shares shoot up while contributing little to GDP.
However, despite Canada's economy and equity markets being "not terribly well-linked," says Mr. Porter, "I do think there's some information there. They're signalling some improvement in 2017."
Stock prices are often anticipatory, rather than reactive, and this can be what's at play here, Mr. Porter says. "One of the strongest equity markets in the world was Brazil, yet the Brazilian economy struggled through another year of outright recession. Another top performer was Russia, and the Russian economy was in recession for most of this year. In both cases, the equity markets were looking forward to a recovery and better times in 2017, and I think that's partially the case for Canada as well."
We shall see. Tune in next December.
Predictions for 2016: Mostly in the ballpark
|Forecaster||GDP growth (%)||Inflation (%)||Unemployment rate (%)||10-year Treasury yield (%)||Canadian dollar (U.S. cents)||Oil (U.S. $)||S&P/TSX composite|
Note: Forecasts for all indicators except S&P/TSX composite are the average for the entirety of 2016. Actual figures are full-year estimates from CIBC for GDP growth, inflation and the unemployment rate; actual YTD average figures for Treasury, Canadian dollar and oil are from Bloomberg. S&P/TSX close as of Dec. 23.
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