TD Economics says that its forecasts for 2006 were more or less on target, although some of its predictions are just proving slow to come true.

“On balance, the economic and financial themes played out quite close to those identified in our December 2005 Quarterly Economic Forecast, though there were some particular hits and misses that can provide lessons for the future,” TD said.

There were a few areas where the accuracy of the explicit forecast numbers fell short, it notes. “In general, there were two key sources of the misses. First, in several cases we still believe that the outcomes will unfold, but the timing now looks more likely to be in early 2007. Second, there were a handful of surprises that impacted a wide range of indicators.”

TD notes that the global economy had greater momentum “than we were led to believe heading into 2006, so it is not surprising that oil and base metals were firmer than anticipated”.

“Domestic Canadian economic conditions were slightly stronger than we predicted virtually across the board due to our underestimating the extent of the Alberta boom,” it adds.

“And, by modestly underestimating the underlying price pressures in the U.S. and Canadian economies at a time that they were operating at close to full capacity, we jumped the gun in terms of when rate cuts would occur, which, in turn, impacted financial markets and economic activity through a large numbers of channels,” it allows.

“It was also driven home this year just how critical it is to accurately predict the output gap if one is to understand the future direction to monetary policy. This means that forecasters need to not only get the economic growth projection correct, but also must accurately predict productivity and the central bank’s estimate of potential,” it says.

Looking ahead, it says notes that U.S. economic growth has been running at below potential for two quarters and it is likely to remain sub-par in the first half of 2007. “In our opinion, this will eventually shift the Fed’s perception of the inflation risks and lead to an easing in policy, with the result that the error in forecast is likely to prove to be a matter of timing,” it says.

“Just like in the U.S. forecast, we predicted that the Bank [of Canada] would ease policy before the end of the year, when in fact it held rates unchanged. This reflected the strength of the domestic Canadian economy that left the Bank concerned about the inflation risks even when economic growth slowed. The Bank also revised down its estimate of the potential pace of economic growth – a development that implied that as economic growth slowed less slack would accumulate,” it says. “Nevertheless, we believe that the forecast error was one of timing and, as the inflation risks diminish, the Bank is expected to cut rates by 50 basis points in the spring of 2007.”