Government Information in Canada/Information gouvernementale au Canada, Volume 3, number/numéro 1 (summer/été 1996)

Which Database and Which Estimates for Forecasting Economic Performance? 1

Isabel B. Anderson 2
Economist


Forecasts of economic performance depend upon estimates of Gross Domestic Product (GDP), but different statistical agencies have different ways of measuring the components that go into making the estimates. This paper uses the Bank of Montreal's mid-year regional outlook for Canada and Saskatchewan to illustrate how the Saskatchewan economy may be growing at twice the Canadian rate, or at half, or at two-thirds, depending upon which set of estimates of real output is used: those prepared by the Saskatchewan Bureau of Statistics or those prepared by Statistics Canada, and of the latter, whether factor cost or market price estimates are used.

This paper shows that there is really no way of reconciling differences in the estimates of Saskatchewan's GDP by the federal and provincial statistical agencies short of doing them again, independently. Even then it is not clear how much difference that would make. There is also no way, therefore, of reconciling what can be markedly different forecasts of economic performance. Nevertheless, with other economic statistics at hand, it becomes possible to interpret the forecasts more effectively.

Les prévisions portant sur les résultats économiques dépendent des estimations du Produit intérieur brut (PIB), mais différents organismes qui oeuvrent dans le domaine statistique utilisent différentes méthodes pour mesurer les éléments qui interviennent dans l'élaboration de ces estimations. Cet article fait appel aux prévisions régionales que la Banque de Montréal publie tous les six mois pour le Canada et la Saskatchewan, afin d'illustrer la façon dont l'économie de la province peut croître à un taux égal à deux fois celui du Canada, ou encore à la moitié ou aux deux-tiers du taux national, selon les données estimatives de la production réelle que l'on utilise--celles préparées par le Bureau de la statistique de la Saskatchewan, ou celles de Statistique Canada. Dans ce dernier cas, on utilise les estimations fondées sur le coût des facteurs, ou sur le prix du marché.

Le présent document indique qu'il est en réalité impossible de réconcilier les divergences entre les estimations du PIB de la Saskatchewan établies par les organismes de statistique provincial et fédéral, à moins de les recalculer de façon indépendante; en outre, on ne sait pas quel écart une telle approche révélerait. Par conséquent, il est impossible de réconcilier des prévisions sensiblement différentes en matière de résultats économiques. Néanmoins, grâce à d'autres statistiques de nature économique, il devient possible d'interpréter les prévisions de façon plus efficace.


Forecasts of growth in economic activity depend upon estimates of Gross Domestic Product (GDP), the mainstay of national income accounting, but each statistical agency can have its own preferences for measuring the components needed to construct the estimates, and GDP can be measured in more ways than one. The Bank of Montreal's mid-year regional outlook for the Canadian economy raises questions about which of two statistical agency databases (the federal or provincial government) best covers the information needed to make the estimates of real GDP in Saskatchewan, and about which estimates (factor cost or market price) best represent the changes in economic activity that can be expected.

Using the Bank's forecasts, this paper shows how different estimates of real GDP can give quite different predictions of economic performance in a Canadian province. The problem is defined in the first part of the paper. The alternate estimates are explained in the second. The implications of using one or other of the different estimates to make forecasts are explained in the third.

Introduction

The rate of growth of real or constant dollar, Gross Domestic Product (GDP), is often used to describe the rate of growth of economic activity in general. Most economists supplement it with figures on employment and a variety of other indicators. Real GDP attracts much attention each year, however, when forecasters release their projections of its rate and explain what they think might be expected in the months ahead. The Economics Department of the Bank of Montreal, for example, in July forecasted that the Canadian economy (that is, real GDP), would grow by 1.80 percent in 1996 and 3.50 percent in 1997 following an actual rate of 2.20 percent in 1995, while the Saskatchewan economy would grow by 1.75 and 2.75 percent in 1996 and 1997 respectively, following an actual rate of 0.80 percent in 1995 (Bank of Montreal, July, 1996).

The Bank's projections for Saskatchewan raise three questions: Which estimate of real output should be used to make the provincial forecasts? Is the rate of growth of the provincial economy likely to be above or below the national rate in 1996 and 1997? Is a forecasted rate of growth of real output a good proxy for what might be expected from economic activity in general?

There are three reasons for being concerned about the Bank's forecasts. First, they are for real GDP at market prices in the case of Canada, but for real GDP at factor costs in the case of the provinces. Secondly, in the case of Saskatchewan, there are two sets of estimates of real GDP at market prices which imply different things about this year and next, one made by Statistics Canada and one by the Saskatchewan Bureau of Statistics. Thirdly, forecasting models usually implicitly assume that most of output growth is transformed into growth in incomes, spending, and employment in the same time period and in the same economy. That may not be what happens in an export, primary product economy like the one in Saskatchewan.

Estimates of Real Output

The Bank of Montreal's forecasts refer to real GDP, but in two forms: real GDP at factor cost and real GDP at market prices. As long as there is a constant difference over time between a market price and a factor cost estimate of real GDP, there will be little difference in the rates of growth derived from them, but there will be different annual rates when the difference changes over time.

Market price GDP is the total value of output from the point of view of the residents of an economy who are buying the output in the market. It includes indirect taxes, excludes subsidies, and includes capital consumption allowances (as well as a statistical adjustment, usually small, to account for errors in the estimates) because indirect taxes and capital consumption allowances raise, and subsidies lower, the price a consumer pays for a product, compared with what he or she would pay if only the costs of hiring the factors of production (labour, capital, and land) had to be paid to get the output produced. Factor cost GDP is the total value of output from the point of view of what has to be paid to hire all the factors of production needed to produce the output, that is, taking into account the total factor cost of production. A market price estimate is usually higher than a factor cost estimate of real GDP.

Factor cost GDP is derived by adding up the value added in each industry in an economy during a particular period of time such as a year. The market price estimate is derived by adding up all the incomes that are received by residents from their participation in production during the year and, to cross-check, by adding up all that is spent on that production by residents during the year. The total of all incomes received from participating in production is equal to all that is spent on the output. Because forecasting models typically project output from past spending patterns, and price indexes are developed for spending categories of goods, they usually project the expenditures side of real GDP at market prices, as the Bank of Montreal has done for Canada in their mid-year regional outlook.

Statistics Canada has estimated that the value of real GDP at market prices in Canada, in every year from 1984 to 1996, was 12 percent above its factor cost value. There is, therefore, little difference between the rate of growth in real output that is derived from Statistics Canada’s market price GDP and the rate derived from its factor cost GDP. It was just 0.05 percentage points on average each year (differences as high as 0.51 and as low as 0.02). Over the same period, Statistics Canada’s market price estimate of Saskatchewan’s real GDP was an average of seven percent above its estimate of the factor cost real GDP for each year. The difference was as high as $2.2 billion and as low as $422 million out of a total of $15 to $20 billion. The rate of growth differed by an average of 0.33 percentage points each year, but by as much as 3.09 and as little as 0.15 percentage points in any one year.

To complicate things, in the case of Saskatchewan, there are two market price estimates of real GDP. The Saskatchewan Bureau of Statistics prepares its own from essentially the same information that Statistics Canada uses for its factor cost and market price estimates. The Bureau’s market price estimate, like the Statistics Canada market price estimate, was an average of seven percent above the Statistics Canada factor cost estimate each year between 1984 and 1996, but the Bureau’s annual rate of growth was an average of 1.14 percentage points higher than the rate of growth derived from Statistics Canada’s factor cost estimates, as much as 3.90 and as little as 0.21 percentage points higher.

The annual rates of growth of Saskatchewan’s real GDP between 1984 and 1996 are shown in Table 1 with the Statistics Canada national market price rate for comparison. Statistics Canada’s factor cost estimates have the Saskatchewan economy growing by an average of 1.69 percent each year between 1984 and 1996 (0.77 percentage points below the average annual national rate). Statistics Canada’s market price estimates hav eit growing by an average of 2.03 percent each year (0.34 percentage points higher than the factor cost rate, but 0.43 percentage points below the national rate). The Saskatchewan Bureau of Statistics’ market price estimates have it growing at an average of 2.84 percent each year (1.15 percentage points higher than the Statistics Canada factor cost estimates and 0.38 percentage points above the national rate). Two of the average rates are lower and one is higher than the average rate of growth of Canadian real GDP at market prices, but there are substantial differences in particular years, as much as 3.09, 3.90 and 5.40 percentage points in specific years.

While the difference between the factor cost and market price values of total output is composed of indirect taxes, subsidies, capital consumption allowances, and a statistical discrepancy, the difference between the Statistics Canada and Saskatchewan Bureau of Statistics market price values of total output seems to depend upon when the information used to make the estimates becomes available.

The Saskatchewan Bureau of Statistics introduces three pieces of information on output into its database more quickly than does Statistics Canada: the output of agriculture; the output of non-renewable natural resource products; and the output of government services. Together, they represented 28 percent of the total output of the Saskatchewan economy on average each year between 1984 and 1996. The Departments of Agriculture and Energy and Mines in Saskatchewan keep detailed monthly data on output in the sectors which fall under their responsibility for policy. In the case of government services, where provincial classification schemes differ, the federal statistical agency rearranges the provincial data so that the reports for each province can be compared, but that means that it takes longer to integrate the information which comes from the province into the federal database.

Some differences between federal and provincial estimates of real GDP at market prices may be a matter of timing, as, for example, when the accounting basis for a series is changed as it was in the case of agriculture recently. Other differences can come from the fact that it is easier for federal statistical agencies to marshal the research resources needed to develop sets of data such as sophisticated price indexes when there are economies of scale to be gained by doing research for more than one jurisdiction at a time.

It is tempting to believe that the Saskatchewan Bureau of Statistics’ estimates of real GDP come closer to describing what is happening to economic activity in general in Saskatchewan than do the Statistics Canada estimates. However, the difference between them and the Statistics Canada estimates should disappear over time as the information from the province is brought into the Statistics Canada database. Between 1984 and 1996, the Saskatchewan Bureau’s market price estimate of real GDP was the same a s he Statistics Canada market price estimate in only one year, 1987, and the differences were substantial in some years, although they averaged out over the 12 year interval. It cannot be assumed that they will give similar forecasted rates of growth for any one year.

Forecasting Economic Activity from Output

Table 2 shows what the Bank of Montreal’s forecasts for the Saskatchewan economy would have been if the other estimates of real output had been used in its model to make the projections. The Bank’s forecased Canadian rate is included for comparison.

Assuming that the Bank of Montreal’s forecasting model accurately defines the time path of changes in the provincial economy, Saskatchewan could be growing at more than twice, or 0.64 percentage points below the national rate in 1996, and at almost twice, or 1.68 percentage points below it in 1997. These rates are for the growth in output which is not necessarily transformed into spending when the product is ready for the market. With grain farmers in Saskatchewan currently harvesting the best crops they have seen since 1986, and good prospects for sales from mining, quarrying, and oil wells, the 1996 rate of growth of output could be substantially above the Canadian rate. Whether that is above or below the Canadian rate in 1997 depends upon the weather and international markets for grains, potash, uranium, and oil.

The rate of growth of real output in any given year can be a reasonable proxy for changes in economic activity in general only in so far as the incomes generated from producing that output are spent in the same year and on goods produced in the same economy. That need not happen with primary products. Canadian grain farmers, for example, use inventories of an unperishable primary product to change their output in any one year into a stream of income and spending over several, one that better fits their individual needs and better reflects developments in the international markets for their product. Grain produced in 1996 will be transformed into some income in 1996, and into spending over several months. It will be used to pay down debt, to buy land, to rebuild stocks of the product held on the farm (often a grain farmer’s savings). It will be used to import services, especially holiday travel, and to buy assets, a source of future income. It will be used for maintenance and the replacement of capital equipment. In 1994, current dollar GDP in Saskatchewan grew by 9 percent, real GDP by 5.59 percent, wages and salaries by 2.59 percent, and total personal income fell by 0.06 percent.

Growth in the output of natural resource products does not necessarily mean comparable rates of growth in employment either. Production from Saskatchewan’s agriculture, and mining, quarrying, and oil wells is highly capital intensive. There is often excess capacity, especially in the mining sector. With the highest average weekly earnings and the second highest hourly earnings in the mining, quarrying, and oil wells sector, high rates of growth in exports in 1990, 1991, and 1994, for example, meant more spending, but average monthly employment by mid-year 1996 was still 10 percent below what it was in the mid 1980s and the growth in monthly employment remained much below what it was in the rest of Canada. Real gross fixed capital formation in manufacturing had fallen by 29, 58, and 50 percent in 1992, 1993, and 1994 respectively. In public administration it fell, on average, by half a percent each year throughout the 1980s and 1990s. Opportunities for growth in employment had become limited by the mid 1990s.

Will the Saskatchewan economy, output, income, and employment grow at almost twice the Canadian rate in 1996 and 1997 as would be suggested by the Bank of Montreal’s model if the Saskatchewan Bureau of Statistics’ market price estimates of real GDP had been used to make the forecasts? Or will it grow at less than half the Canadian rate as would be suggested by the Bank’s model if Statistics Canada’s market price estimates of real GDP had been used to make the forecasts? Or at two-thirds the Canadian rate as is suggested by the Bank’s model when the Statistics Canada factor cost estimates of real GDP are used to make the projections?

The Bank of Montreal'’s forecasts for Saskatchewan are based o nmodest growth in housing starts and employment with little change in the rate of unemployment. Using its model to project the Saskatchewan Bureau’s market price real GDP may best describe what can be expected from the growth in provincial output in 1996 and 1997, but its forecasts of Statistics Canada’s factor cost real GD, may best describe what can be expected of economic activity in general: output growing at more than the Canadian rate, even substantially more, but economic activity in general growing at less than the Canadian rate, an ironic twist to forecasting insofar as factor cost estimates of total real GDP refer specifically to the output of goods and services while market price estimates are usually used to refer to total income and spending.

By the 1970s and 1980s Saskatchewan had become a more diversified natural resource based economy, but by the early 1990s, much of the gains from promoting manufacturing in the 1980s had been lost. There had been little economic development, that is, diversification which broadened the prospects for generating employment in areas other than the export primary product sectors. Exports of oil, potash, and uranium had become as important as agriculture in generating incomes and employment both directly and indirectly, but the economy remained a primary product export economy where economic activity is excessively sensitive to the vicissitudes of international commodity markets and the weather.

It is unusual not to use comparable estimates of output to make projections of real GDP, as the Bank of Montreal has done, but it is important to separate a forecast of the growth in real output from an expectation of the prospects for economic activity. Forecasts of real GDP are useful guidelines for indicating whether policy-makers are likely to achieve their budget objectives. From that point of view, it may be better to under-estimate than to over-estimate a rate of growth. Nevertheless, forecasts that do not accurately describe what can reasonably be expected of economic activity in the future make it impossible to judge the effectiveness of existing policies, which new policies may be needed, and how close budget projections will be by the end of the year.

Unfortunately, there is no way of reconciling the different rates of growth of output which are derived from the different sets of estimates of GDP short of making another set of estimates. There is also no way, therefore, of reconciling what can be quite different forecasts of economic performance. It is extremely important to supplement forecasts of the rate of growth of real output with a wide range of other economic statistics. Even then there is little guidance for choosing a best forecast for any one year, even when particular models and forecasters have been successful in the past.


REFERENCES

Bank of Montreal, Economics Department. Regional Outlook, July, 1996. Toronto: Bank of Montreal, 1996.

Canada, Department of Finance. Economic Reference Tables, August, 1996. Catalogue no. F1-26/1996E. Ottawa: Department of Supply and Services, Canada Communication Group, Publishing, 1996.

Canada, Statistics Canada. (11-210-XPB). Canadian Economic Observer. Catalogue no. 11-210-XPB, 1995-96. Ottawa: Department of Supply and Services, 1996.

Canada, Statistics Canada. (15-203-XPB). Provincial Gross Domestic Product by Industry, 1984-1995. Catalogue no. 15-203-XPB. Ottawa: Department of Supply and Services, 1996.

Saskatchewan, Bureau of Statistics, Saskatchewan Economic Statistics. Regina, Bureau of Statistics, 1996.


Notes

[1] May be cited as/On peut citer comme suit:

Isabel B. Anderson, "Which Database and Which Estimates for Forecasting Economic Performance?" Government Information in Canada/Information gouvernementale au Canada 3, no. 1.
<http://www.usask.ca/library/gic/v3n1/anderson/anderson.html>
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[2]

Isabel B. Anderson
A and L Information Brokers
1212 Colony Street
Saskatoon, Saskatchewan
S7N 0S6
phone: 306 653 5352
fax: 306 975 1392
aalinfo@eagle.wbm.ca
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