Download The macroeconomic model

Lesson 7
PUBLIC FINANCE
MAKRO-ECONOMY FORECAST
The Macroeconomic Forecast is prepared by the Financial Policy
Department of the Czech Ministry of Finance on a quarterly
basis. It contains a forecast for the current and following years
(i.e. until 2016) and for certain indicators an outlook for another
2 years (i.e. until 2018). As a rule, it is published in the second
half of the first month of each quarter.
Preparation of the Macroeconomic Forecast
The Ministry of Finance of the Czech Republic produces a
thorough system of forecasts of all fields of macroeconomic
developments. In the forecasting process, both the results of
macroeconomic model and expert judgements are used.
Statistical analysis
In the first phase of the forecast preparation, a thorough
statistical analysis of past economic developments is conducted.
Estimates from the last macroeconomic forecasts are compared
with actual developments and the causes of eventual
discrepancies are analysed. For estimating past developments not
yet covered by the Czech Statistical Office data, business cycle
indicators are used. As for the near future, our opinion is guided
by our own leading indicator and indicators of economic
sentiment released by the Czech Statistical Office.
The macroeconomic model
The results of the macroeconomic model are the key input to the
prognostic process. The MoF uses a simple DSGE (dynamic
stochastic general equilibrium) model of the Czech economy
called HUBERT. The model describes the behaviour of four
basic sectors in the economy: households, firms, the government
and the external environment. Although HUBERT is rather a
simple version of a standard DSGE model, it includes the basic
features of new keynesian economics, such as imperfect
competition, households’ habit formation, nominal and real
rigidities. The current version of the model is used for estimating
the impact of economic policy measures, as well as for regular
macroeconomic forecasts.
In the next phase, the results of the model are judged in the
context of both domestic and foreign economic and political
developments. Potential output (specified using the
Cobb‐ Douglas production function), position in the business
cycle and expected developments in the economies of our main
trading partners are all assessed on the basis of expert
judgements. The impact of monetary and fiscal policy, structural
reforms and other economic policies is also taken into account.
Forecasting can be viewed as a multiple‐ stage iteration
process. Based on the expected GDP and forecasts relating to
other aspects of macroeconomic developments (prices,
labour market, balance of payments), the forecasts of other
variables are derived using simple regression equations.
Verification of the results
The macroeconomic forecast is regularly compared with the
forecasts of other relevant domestic and foreign institutions. An
important event is the so called Colloquium, which takes place
twice a year and the results of which are published on the web of
the MoF.
(http://www.mfcr.cz/en/statistics/macroeconomic‐ forecast)
Macro-economy forecast /real case - July 2015
The Czech economy is growing rapidly. Real GDP recorded
enormous QoQ growth of 2.5%. As in the fourth quarter of 2014,
however, GDP growth was affected by the legal limit on vending
tobacco products with old tax stamp (in the fourth quarter, the limit
weighed on GDP growth). Given the volatility of GDP due to the
changes in law, gross value added is a much more suitable indicator
for assessing the course the economy.
Real gross value added increased by 1.3% QoQ in the first
quarter of 2015, marking the highest increase since the fourth quarter
of 2007. Gross value added rose in almost all sections of the economy,
but most notably (just like in the previous quarter) in manufacturing by 2.6%.
Economic growth was driven exclusively by domestic demand.
Consumption of households and the government, as well as gross
capital formation, increased in YoY terms. Exceptionally high
contribution of change in inventories (including the stock of
unfinished infrastructure projects) was due not only to restocking of
the aforementioned tax stamps, but also to the ongoing upturn. In
foreign trade, growth of the main trading partners' economies and
increased imports, which reflect faster growth of domestic demand
and high import content of Czech exports, offset each other.
Other basic macroeconomic indicators confirm the good state of the
economy. Households continue to benefit from very low inflation. On
the labour market, employment is increasing rapidly and
unemployment is falling. Current account of the balance of
payments has been in surplus since 2014.
In 2015, the economy is stimulated by several one-off factors. Firstly,
it is a positive supply shock resulting from the low price of oil - on
average the koruna price of Brent crude oil should be a quarter lower
in 2015 than it was in 2014. Another positive factor is fiscal stimulus,
the extent of which is estimated around 0.4% of GDP. The effect of
the expansive fiscal policy is further intensified by the drawdown of
EU funds from the financial perspective 2007-2013, which can be
utilized by the end of 2015.
The unexpectedly strong economic growth in the first quarter is the
principal factor behind a sharp revision of the forecast for real GDP
growth in 2015 from 2.7% to 3.9%.
Better performance of the real economy doesn't form a basis for a
major revision of the forecast for tax revenues. This is due to the fact
that tax revenues are mostly determined by nominal aggregates.
Compared with the previous Forecast, the forecast for nominal GDP
growth has been revised only marginally (from 4.7% to 4.9%).
As far as individual expenditure components are concerned, gross
fixed capital formation and change in inventories, which are tax
ineffective, were subject to the biggest upward revisions. The greatest
direct impact on tax revenues has nominal consumption and nominal
wage bill. The forecast for these aggregates was changed only
marginally.
The aforementioned factors should subside in 2016 and economic
growth should reflect normal conditions and potential of the Czech
economy.
Given that the legislation (that limits vending tobacco products with
old tax stamps) is now anchored, extreme fluctuations in revenues
from excise tax should not repeat. The anticipated higher price of oil,
through its effect on the costs of firms, will have a proinflationary
impact, just like the widening positive output gap that will increase the
pressure on wage growth.
Fiscal policy will be marginally anticyclical, oriented at the reduction
of the general government deficit. Completion of the EU projects
financed from the previous financial perspective (2007-2013) and a
slower start of drawdown from the new financial perspective 20142020 will weigh on growth of investment.
For these reasons, the forecast for real GDP growth in 2016
remains unchanged at 2.5%.
In our opinion, risks to the Forecast are tilted to the downside,
especially due to the risks that we see in the external environment of
the Czech economy.
The uncertainty related to the course of the Chinese economy, which
could lead to a slowdown of European exports to this region, is a risk
to the development of global trade. Continued tension in Ukraine or
instability in the Middle East and Northern Africa, which could
influence the developments on oil and natural gas markets, are other
risks to the global economy. The situation of Greece, even though it is
going through rather dramatic developments, should not have a
significant direct impact on the Czech economy.
In the Czech economy, pressure on the exchange rate to appreciate
below 27 CZK/EUR can emerge. However, the tools the CNB has are
sufficient to prevent excessive appreciation.