Download Estimates of Provincial Trend Real GDP Growth. August 30, 2006.

ALBERTA FINANCE
Office of Budget and Management
August 30, 2006
Economic Spotlight
Potential Gross Domestic Product (GDP) is the output that would be produced if an
economy were operating at full capacity. This measure can help identify whether or not a
given actual real GDP growth rate is sustainable in the long term.
While potential GDP cannot be measured explicitly, numerous techniques, such as
Hodrick-Prescott (H-P) filtering, exist to estimate trend GDP, which can serve as a
suitable proxy. By averaging the growth in trend real GDP over the past five years, we
have produced a benchmark to examine whether actual real GDP is growing faster or
slower than trend real GDP.
Alberta’s five-year average trend growth rate is second highest among the provinces,
behind only Newfoundland and Labrador. Saskatchewan, in contrast, has the lowest fiveyear average trend growth rate among the provinces.1 In 2005, all but two provinces,
Prince Edward Island and New Brunswick, operated above trend output. Somewhat
Real GDP Growth (over the past 5 years)
5.00%
Actual
4.50%
Trend
4.00%
Conference Board Long-Term Forecasts (2005-2025)
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
1
British
Columbia
Alberta
Saskatchewan
Manitoba
Ontario
Quebec
New
Brunswick
Nova Scotia
Prince Edward
Island
Newfoundland
and Labrador
0.00%
Canada
This copy is for archival purposes only. Please contact the publisher for the original version.
ESTIMATES OF PROVINCIAL TREND REAL GDP GROWTH
A five-year average actual real GDP growth rate above the five-year average trend real GDP growth
rate does not automatically imply that the province is operating above capacity (ie: is in a boom period).
For example, the province could be operating below capacity but be returning to trend real GDP.
Newfoundland Real GDP
Alberta Real GDP
(millions of chained 1997 dollars)
(millions of chained 1997 dollars)
145,000
16,000
15,500
15,000
14,500
14,000
13,500
13,000
12,500
12,000
140,000
135,000
130,000
125,000
Actual
Trend
This copy is for archival purposes only. Please contact the publisher for the original version.
120,000
115,000
2000
2001
2002
2003
2004
2005
2000
2001
2002
2003
2004
2005
surprisingly, Ontario operated 0.7% above trend output in 2005, implying that, to invoke
a colloquialism, tales of its economic demise have been greatly exaggerated.
The results suggest that on average the Alberta economy has been growing at
approximately the rate of trend real GDP over the past five years, which is sustainable
over the long term. Actual real GDP growth in 2005, however, was 4.5%, which is above
trend and increased Alberta’s positive output gap to 2.2%.
Newfoundland and Labrador’s actual real GDP has grown far faster than trend real GDP
over the past five years, in part due to Hibernia, which began operating in 1997. This
rapid growth at the beginning of the decade could, in light of the recent development and
operations of offshore oil and gas platforms, be thought of as a movement to a new
steady state, rather than as a permanently sustainable rate of growth.
Growth in Ontario’s actual real GDP over the past five years has been slower than growth
in trend real GDP. According to the estimates, Ontario has been operating above trend
real GDP since approximately 1999, so slower growth over the past five years has merely
served to move Ontario closer to trend output.
Finally, for the nation as a whole, average actual real GDP has been growing below the
rate of average trend real GDP. This result is even more pronounced using auxiliary
estimation techniques. The low average actual growth rate appears to be a return to trend
output, rather than deviation away from it. This is similar to the findings for Ontario,
which is not surprising given that Ontario constitutes over 40% of the Canadian
economy.
Ontario Real GDP
Canadian Real GDP
(millions of chained 1997 dollars)
(millions of chained 1997 dollars)
1,200,000
500,000
1,150,000
475,000
1,100,000
450,000
1,050,000
425,000
1,000,000
400,000
950,000
2000
2001
2002
2003
2004
2005
2000
2001
2002
2003
2004
2005