QEDinc’s Summer 2020 outlook is now available. Economic forecasts for 2020 and 2021 are strictly a story telling motif. They are predicated on too many assumptions about the pandemic and its consequences for public health, societal behaviour, public policy, international cooperation, and the resiliency of the business sector to be viewed as reliable predictions. Some forecasters will hope for a rapid economic rebound based on an optimistic view of pent-up demand being unleashed as social restrictions are removed while others anticipate lasting damage as social restrictions are periodically reintroduced and businesses and other institutions fail to survive the disruption. While the middle-of-the-road consensus is far from a safe bet, it is one that many economic observers hope will provide a measure of prudence for economic planning purposes.
This forecast is based on a new version of the Canadian Modeling System (CMS). The system had grown to nearly 10,000 equations from about 7,500 in the previous version. Teething pains in its completion delayed and eventually cancelled the release of our Winter 2020 forecast as unfolding events quickly overtook any projection.
The new version of the CMS has expanded the traded commodities sector. It now includes twelve internationally traded merchandise trade commodities for each province and territory in conjunction with international trade in services and domestic trade in both goods and services. This enhancement significantly enhances the estimated impact of changes in global economic activity and commodity prices on export performance across the country and import demand based on sectoral shifts in domestic activity. And the price block has been enhanced to reflect the influence of the additional imported commodity prices on domestic prices.
Labour market information has also been expanded to provide employment and wages for both SNA industries and LFS occupations. The number of NAICS sectors has been expanded to 15 for employee jobs and labour compensation plus total self-employed jobs and compensation for each province and territory. The SNA labour market concepts are linked to LFS employment and other basic LFS concepts, such as unemployment and the labour force, for each province and territory and to both employment and average weekly wages for ten LFS occupation groups.
With the success of the model’s local government fiscal rules, the new version has introduced fiscal sustainability rules for the federal and provincial governments. At the local government level, property tax rates adjust to yield an appropriate path for that level of government’s fiscal balance consistent with their spending plans. The federal and provincial governments have more fiscal levers and latitude than local governments. The modeling system allows these levels of government to borrow without restriction until debt servicing costs approach unsustainable levels. At this point, the CMS implements an austerity program that raises tax rates and limits expenditures to shift the jurisdiction to a more sustainable fiscal path; avoiding potential ponzi schemes. Conversely, jurisdictions with minimal debt servicing costs provide politicians of all political stripes with an opportunity to lower tax rates and raise spending!
More exciting enhancements to the CMS are planned for the next few months! Stay tuned for more details.