Download Forecasting Real GDP

Refresher on Real Sector
&G
Generating a first
f
GDP
G
Forecast
Financial Programming and Policies
Yangon, Myanmar
February 16–27, 2015
Jan Gottschalk
TAOLAM
IMF-TAOLAM training activities are supported by funding of the Government of Japan
Outline
I. General Approach
pp
to Forecastingg GDP
II. Forecastingg Real GDP
III. Forecastingg Inflation & GDP Deflator
IV. Puttingg It All Together:
g
Nominal GDP
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2
General Approach to Forecasting GDP
Why does forecasting GDP matter?
• GDP forecast is the starting point for
many other forecasts, e.g., revenues or
imports
• Similarly, GDP forecasts are necessary
for projecting GDP ratios
• GDP forecasts are central for
macroeconomic management
3
General Approach to Forecasting GDP
It’s difficult …
• It’s very rare that the
forecast hits exactly the
mark (if so
so, it’s
it s just luck!)
• The forecast ‘number’ is
important (e.g., for the
budget), but …
• … the ‘story’ behind the
forecast is often as
important: this is why we
spent the first session
looking at the ‘big picture’!
4
General Approach to Forecasting GDP
General procedure
• Start with analyzing the past:
what were key developments
and how are they going to affect
the present and future?
 We looked at recent
economic developments
during the first session
• What do we know about the
present (nowcast)?
 We will look at available
indicators in the afternoon
5
General Approach to Forecasting GDP
General procedure (continued)
• Forecast is an extrapolation of
past and present, taking policy
(changes) into account
 You have studied the
growth potential and
developed a growth
strategy, both of which
should help to guide the
forecast
6
General Approach to Forecasting GDP
Remember distinction between nominal and real:
 Nominal GDP: measures the value of output of
the economyy at current prices
p
 Real GDP: measures the value of output of the
economy -- changes in an economy’s
economy s physical
output -- using prices of a fixed base year
 GDP deflator: price component of GDP,
computed as Nominal GDP/Real GDP
7
General Approach to Forecasting GDP
Typical forecasting approach:
 Start with forecasting real GDP
 Forecast inflation
 Forecast GDP deflator as function of inflation
f
forecast
t
 Compute
Nominal GDP = Real GDP x GDP Deflator
8
Outline
I. General Approach
pp
to Forecastingg GDP
II. Forecastingg Real GDP
III. Forecastingg Inflation & GDP Deflator
IV. Puttingg It All Together:
g
Nominal GDP
9
Forecasting Real GDP
Various approaches for forecasting real GDP:
 Forecast
– Potential output and output gap
– Supply-side approach:
• Production function
• Sectoral forecasts
– Demand-side approach:
pp
forecast expenditures (C + I + X - M)
– Reconciliation of Supply & Demand
10
Forecasting Real GDP
—Potential GDP & Output
p Gap
p
Positive output gap:
demand > supply
Negative output gap:
demand < supply
11
Forecasting Real GDP
—Potential GDP & Output
p Gap
p
How does this approach help us?
 Our study of the growth potential in the first session
provides us with an idea of the underlying growth
rate off M
Myanmar’s
’ economy, which
hi h iis equivalent
i l
to
estimating the path for Myanmar’s potential output
 Actual output will deviate from potential output
depending on demand condition: later in the
workshop we will consider the impact of fiscal,
monetary and external conditions on demand and
adjust the real GDP forecast accordingly
12
Forecasting Real GDP
—Production Function Approach
pp
 Q = f ((K,, L,, A))
where K = Capital
L = Labor
A = Technology, Institutions
 In the long run, increasing supply requires
increasing A (through structural policies)
13
Forecasting Real GDP
—Production Function Approach
pp
How does this approach help us?
 We won’t use this approach directly
 But this approach has helped us indirectly already
because a production function is central to the ADB
growth scenarios that guide our estimate of
Myanmar’s underlying real GDP growth rate
14
Forecasting Real GDP—
GDP—Sectoral Forecasts
Supply-side: sectoral forecasts
Forecast production in each sector separately as they may have
different determinants, then add up the individual forecasts to
obtain
b i the
h total:l
We practiced this
in the introductory
workshop …
15
Forecasting Real GDP—
GDP—Sectoral Forecasts
Sectoral forecasts: how does this approach help us?
GDP Growth (Constant 2010/11 Prices)
14%
12%
GDP (constant
2010/11 prices)
10%
Agriculture
8%
6%
Industry (incl.
mining &
construction)
4%
2%
Services and trade
0%
2014//15
2013//14
2012//13
2011//12
2010//11
2009//10
This will be the main
method for you to generate
your real GDP forecast in
the macroeconomic
framework in the following
workshop
p session.
You need to make sure that
your sectoral forecasts are
consistent with your
growth strategy and other
considerations from the
first session …
16
Forecasting Real GDP—
GDP—Demand Approach
Demand-side: forecasting expenditures
GDP = (CP + CG) + (IP + IG) + (X – M)
Fiscal sector
BOP
 We should be able to forecast public consumption and
investment (CG & IG) using information from the budget
 We have forecast equations for exports and imports
(X – M) [External sector]
Private consumption (CP) is often fairly steady and not that
difficult to forecast
Leaves private investment (IP) as a very difficult element to
forecast because this tends to be fairly volatile
17
Forecasting Real GDP—
GDP—Demand Approach
How does this approach help us?
 The expenditure approach is closely linked to analyzing
demand conditions and therefore to the
aforementioned output gap approach
 Later in the week when we consider fiscal, monetary
and
d external
t
l conditions,
diti
we will
ill make
k adjustments
dj t
t tto
the real GDP forecast to reflect the demand approach
 Next week
week, when we put the forecast together
together, we will
need to make sure that the supply- and demand
approaches are consistent with each other
18
Outline
I. General Approach
pp
to Forecastingg GDP
II. Forecastingg Real GDP
III. Forecastingg Inflation & GDP Deflator
IV. Puttingg It All Together:
g
Nominal GDP
19
Forecasting Inflation & GDP Deflator
Inflation determinants
Π
(Price
Inflation)
20
Forecasting Inflation & GDP Deflator
Macroeconomic framework forecasts inflation
(automatically) as a function of:
 It’s own past  captures sluggish adjustment of
inflation to shocks/changes in its determinants
 A constant  captures broadly the level of inflation
in the absence of any other determinants:
represents the inflation anchor
 Reserve money growth  captures role of
monetary policy (and partly demand conditions)
21
Forecasting Inflation & GDP Deflator
Macroeconomic framework forecasts inflation
(automatically) as a function of (continued):
 International food commodity prices  captures
role of imported inflation in form of import prices in
foreign currency (US dollars)
 Kyat/US dollar exchange rate  captures role of
imported inflation in form of exchange rate pass
through
22
Forecasting Inflation & GDP Deflator
Average inflation 2010-14: serves approximately as
inflation anchor,
anchor i.e.,
i e you can expect that in the medium
term inflation will converge to this level:
Inflation (Year-on-Year)
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
2.0
2
2010M01
2010M04
2
2010M07
2
2010M10
2
2011M01
2
2011M04
2
2011M07
2
2011M10
2
2012M01
2
2012M04
2
2012M07
2
2012M10
2
2013M01
2
2013M04
2
2013M07
2
2013M10
2
2014M01
2
2014M04
2
2014M07
2
2014M10
2
-4.0
Inflation YoY
Inflation YoY 2010-14
23
Forecasting Inflation & GDP Deflator
Reserve money matters for inflation in Myanmar:
Reserve Money & Inflation
10
40
8
35
30
6
25
4
20
2
15
0
10
Inflation YoY
2014M10
2014M07
2014M04
2014M01
2013M10
2013M07
2013M04
2013M01
2012M10
2012M07
2012M04
2012M01
2011M10
2011M07
2011M04
2011M01
2010M10
0
2010M07
-4
2010M04
5
2010M01
-2
Reserve Money YoY (right axis)
24
Forecasting Inflation & GDP Deflator
Link between reserve money growth & inflation in inflation
model in macroeconomic framework:
Response Year-on-Year Inflation Rate
Increase in
annual reserve
money growth
by 10% raises
annual
inflation by
about 1% with
about 5
months delay.
12.0
10.0
0.8
0.7
0.6
80
8.0
6.0
4.0
0.5
0.4
03
0.3
0.2
2.0
0.0
RM - yoy
Inflation
(yoy) - right
axis
0.1
0.0
25
Forecasting Inflation & GDP Deflator
International food commodity prices also have a
noticeable influence:
Inflation & International Commodity Prices
10
50
8
40
6
30
4
20
2
10
0
0
Inflation YoY
2014M10
2014M07
2014M04
2014M01
2013M10
2013M07
2013M04
2013M01
2012M10
2012M07
2012M04
2012M01
2011M10
2011M07
2011M04
2011M01
2010M10
-20
2010M07
-4
2010M04
-10
2010M01
-2
Commodity Prices (Food) YoY (right axis)
26
Forecasting Inflation & GDP Deflator
Link between food commodity price growth & inflation in
inflation model in macroeconomic framework:
12.0
Increase in
international
food prices by
10% raises
annual
inflation by
about 1% with
about 2
months delay.
Response Year-on-Year Inflation Rate
1.2
10.0
1.0
8.0
0.8
6.0
0.6
40
4.0
04
0.4
2.0
0.2
0.0
0.0
Comprice yoy
Inflation yoy (right
axis)
27
Forecasting Inflation & GDP Deflator
The role of the exchange rate becomes visible when we consider
quarterly inflation rates:
Exchange Rate & Headline CPI (Q-o-Q Change in %)
5%
20%
4%
15%
3%
10%
2%
5%
1%
0%
0%
CPI (headline,
2010=100)
-5%
-1%
-10%
-2%
-3%
15%
-15%
-4%
-20%
-5%
-25%
Exchange rate
(lead 2, right
axis)
Jun-14
Jan-14
ug-13
Au
Mar-13
Occt-12
May-12
Deec-11
Jul-11
Feeb-11
Seep-10
Ap
pr-10
ov-09
No
Jun-09
Jan-09
28
Forecasting Inflation & GDP Deflator
Link between kyat/US dollar exchange rate & inflation in
inflation model in macroeconomic framework:
Response Year-on-Year Inflation Rate
12.0
Depreciation
of kyat/US
10.0
dollar rate by
8.0
10% raises
annual
6.0
inflation by
about 1% with 4.0
about 2
2.0
months delay.
1.2
0.0
0.0
1.0
0.8
Fx rate - yoy
0.6
0.4
0.2
Inflation yoy (right
axis)
3
37.0
3
34.0
3
31.0
2
28.0
2
25.0
2
22.0
1
19.0
1
16.0
1
13.0
1
10.0
7
7.0
4
4.0
1.0
1
29
Forecasting Inflation & GDP Deflator
Definition of GDP deflator
Real
Consumption

Consumption
Deflator
=
Real
Investment

Investment
Deflator
=
Real
Exports

Export
Deflator
=
Real
Imports

Import
Deflator
=
Real GDP
Nominal
Consumption
Nominal
Investment
Nominal
Exports
Nominal
Imports
Nominal GDP
GDP Deflator 
Nominal GDP
Real GDP
100
30
Forecasting Inflation & GDP Deflator
Forecasting the GDP deflator
 C
Consumption:
ti
%∆ PC = %∆ CPI
 Investment:
%∆ PI = (1-a) %∆ CPI + a %∆ PM
(a = share of imported investment goods)
 Export:
%∆ PX = ((1
((1+%∆
%∆ Export price in US$/100) *
(1+%∆ Exchange rate/100) –1) *100
 Import:
p
%∆ PM = ((1+%∆ Import price in US$/100) *
(1+%∆ Exchange rate/100) –1) *100
31
Forecasting Inflation & GDP Deflator
For Myanmar, change in GDP deflator and annual inflation move
very closely together, so we can project GDP deflator directly as a
function of inflation:
Inflation & GDP Deflator
35%
30%
25%
20%
%
15%
10%
5%
0%
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14
Inflation, average
Annual change in GDP Deflator
32
Outline
I. General Approach
pp
to Forecastingg GDP
II. Forecastingg Real GDP
III. Forecastingg Inflation & GDP Deflator
IV. Puttingg It All Together:
g
Nominal GDP
33
Putting It All Together: Nominal GDP
Nominal GDP forecast:
• Forecast real GDP growth
• Forecast GDP deflator
• Compute nominal GDP as
Nominal GDPt+1 = Real GDPt+1 GDP
Deflatort+1
34
Outlook
Next, you will generate a first draft of the GDP
forecast:
35