It may not take into account high and low pressures as well as the jet stream, but economic forecasting strives to predict whether the economy will be weathering future storm clouds or if companies will enjoy sunny, warm conditions conducive to positive economic growth and prudent strategic business planning.
At EDC, our economic forecasts are our view of where the economy is headed. For Canadian companies, forecasts are great tools to assist in making future investment decisions.
In an effort to give Canadian companies a roadmap to navigate both the domestic as well as global economies, we develop quarterly economic forecasts. However, our major tool, the Global Economic Outlook, is developed bi-annually in the Spring and Fall.
There are many variables that economists take into consideration when developing a forecast, but each model is developed by analyzing specific economic indicators (key statistics that indicate the direction of an economy) that fall into three categories: leading, coincident and lagging. This is then combined with qualitative analysis such as policy announcements, labour dynamics and demand drivers.
In a nutshell, leading indicators move ahead of the economic cycle, coincident indicators move with the economy and lagging indicators trail behind the economic cycle.
Leading indicators, used to predict future movements of the economy, include metrics like barometers of consumer sentiment, surveys of purchasing managers, building permits and the number of new business start-ups.
When a building permit is registered, you know it will lead to a future housing start, for example.
Comparatively, lagging indicators provide a description of where the economy has been and include variables such as the unemployment rate and the Consumer Price Index (CPI)—an indicator of changes in consumer prices or inflation. It is obtained by comparing, over time, the cost of a fixed basket of goods and services purchased by the average household.
Coincident indicators show the current state of the economy and occur at approximately the same time as the conditions they signify. Coincident indicators include personal income statistics as well as Gross Domestic Product, (GDP) what many describe as the most important economic indicator. GDP is the monetary value of all the finished goods and services produced within a specific timeframe. It is used to gauge the overall health of the economy.
Developing a forecast involves analyzing many of these variables, as well as historical trends to develop statistical economic models. Ultimately, however, the final forecast relies on the individual forecaster’s experience and intuition to create a storyboard of the economy moving forward.
As forecasters, we always want to say that we nailed it. However, forecasting starts as science, and ends up being more of an art.
Our Global Economic Outlook is a comprehensive analysis and projection of global growth, measured in terms of GDP. It forecasts the change in terms of percentage based on data from the previous year. For example, the Global Economic Outlook in the Fall of 2017 pegged global economic growth to grow by 3.6 per cent by the end of the year.
The Global Economic Outlook also forecasts GDP performance domestically, as well as for developed countries including the U.S., the Eurozone, Japan, and key emerging economies such as Mexico and the BRICS—Brazil, Russia, India, China and South Africa. It also focuses on the global performance of commodities—a basic good close to its natural state—including oil, natural gas, gold and copper, and predicts the value of the Canadian dollar versus the U.S. dollar and the level of the Federal Reserve’s interest rate, for the next two years.
A key aspect of the Global Economic Outlook is that the forecasts contained in it ultimately inform or feed into EDC’s outlook for Canada’s export in different sectors, forming the basis for the Global Export Forecast.
The Global Economic Outlook is a comprehensive analysis and regardless of where Canadian companies are on their export journey, this is a vital planning tool.
While many larger companies hire their own economic analysts, many small- and medium-sized enterprises don’t have the necessary resources for such an undertaking. And helping those companies is the driving force behind EDC’s Global Economic Outlook. For Canadian companies looking to export for the first time, the data provides invaluable insight into the future prospects of the domestic economy as well as key export markets.
Companies that are already exporting, but possibly looking to expand into new markets, can utilize the statistics in different indicators to identify targets or niche markets.
Regardless of company size, one of the key indicators is the health of the U.S. economy, especially because of our integrated supply chains.
The U.S. is our closest trading partner, so trends in the U.S. can impact Canada domestically as well as exporters doing business there.
An example of this is the current trend developing in the U.S. whereby the labour force participation rate is increasing, specifically among the younger, millennial generation. As a result, many sectors of the Canadian economy are benefiting from spin-off effects due to higher U.S. demand.
If millennia’s start to move out of their parents’ basements, for example, that’s going to cause an increase in new housing starts which will mean a boost for the Canadian lumber industry. But there will also be an upswing for other sectors including electronics, appliances and furniture. It’s very much interconnected.
What goes into EDC’s Global Economic Outlook Forecast?
Comprehensive analysis and research.
Developing the Global Economic Outlook is a two-step process that is conducted on a quarterly basis, but has two key milestones—the Spring and Fall Global Economic Outlooks.
The process is ongoing and begins with our team of analysts who are responsible for producing forecasts. In order to do this, each analyst looks at a broad spectrum of supply and demand indicators, and monitors current events on an ongoing basis.
We look into the relationships among different metrics, leverage various methods to analyze data and run models, benchmark against external forecasts and often travel to specific markets to inform our internal views.
Combined with an analysis of historical data, this provides a foundation to identify possible key trends in specific sectors and markets.
Using various modeling techniques, both qualitative and quantitative approaches are employed to develop each specific forecast.
Once we complete our specific forecasts, the EDC Economics team, led by Chief Economist Peter Hall, meets to horse trade forecast proposals and work on the details of the more comprehensive global forecast.
We pride ourselves in taking a team approach. It makes for some very interesting discussions, but at the end of the day, our goal is to provide the best forecast that Canadian companies can use as a planning tool.
Overall, the EDC Economics team takes a myriad of economic data and statistics and tries to synthesize it into a storyboard that projects an economic roadmap for the future.
We challenge ourselves to be the best that we can be. No one is born a good forecaster; it takes experience and good intuition. It’s a matter of taking a look at as many indicators as possible and having a clear, holistic picture of what they mean.