Daily nowcasting of global and Australian GDP growth1
Now(cast) you’re talking!
Some economic series are published infrequently and with a significant lag; GDP is a prime example. In Australia, it is published on a quarterly basis more than two months after the end of the quarter. Nowcasting2 is a technique that allows a series to be estimated in real-time based on other series which are more frequent and timelier. For example, current quarter GDP could be forecast using a combination of daily, weekly, monthly, and quarterly series. Here, the nowcast could be updated daily (the highest frequency of the data being used to explain GDP) based on the data available to that point in time across all the frequencies assessed.
Nowcasting addresses the challenges posed by the low frequency and delayed nature of some data releases by allowing for forecasts of these series to be updated in real-time in response to incoming information. This is important when economic circumstances are changing rapidly, such as the case at present.3
There are dozens, if not hundreds, of indicators that could be used to nowcast GDP growth. To account for as much of this information as possible, I have used a statistical technique to extract the common trends across a range of series. I have then used these trends in a mixed-frequency model to estimate GDP on a daily basis. Such a high frequency has not commonly been used in previous studies5 and is useful as it allows for a very timely assessment of economic conditions. The results of this exercise can be seen in Graphs 1 and 2 below.
The daily nowcast of global GDP growth (Graph 1) matches actual annual GDP growth (published quarterly) consistently throughout the period examined, including through the global financial crisis and COVID-19 shock.
Graph 1: Global GDP Nowcast
Similarly, the daily nowcast of Australian GDP growth (Graph 2) moves with actual annual GDP growth (published quarterly) reasonably well.
Graph 2: Australian GDP Nowcast
At present, and with estimates up to the current quarter (Q2), the global nowcast suggests that annual GDP growth has held-in at firm rates so far in 2021. Meanwhile, the Australian nowcast indicates that after peaking at the end of 2020, daily nowcasts of annual GDP growth have slowed so far this year.
It should be noted that due to large base effects6, gauging underlying economic momentum based on annual GDP growth rates will be challenging over the coming few quarters.7 The nowcasts presented above have not been adjusted to account for this as these impacts are temporary and should fade as the year progresses.
Nowcasting offers the opportunity to conduct real-time assessments of economic activity. It helps give a contemporary sense of potential outcomes for series which are released at a low frequency and with a lag. It is always useful, but arguably more so at turning points in the economic cycle when visibility over what can be significant changes in economic conditions may be low. While base effects might complicate the interpretation of underlying economic momentum in the near term, the nowcasts of global and Australian GDP growth introduced in this note (and outlined in more detail in the technical appendix) provide a useful means for us to track how the recovery is unfolding. These will be further updated and refined over time and presented in our economic research going forward.
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(1) This article draws on discussion from, while updating and extending the analysis in, this blog I did at the end of 2018.
(2) ‘Nowcasts’ are forecasts of the here and now (‘now’ + ‘forecast’ = ‘nowcast’)
(3) In a separate note my colleague Trent Saunders uses a different form of nowcasting to quantify recent strength in the domestic economy before analysing what this could imply for the outlook for the economy and RBA cash rate.
(4) For further details on the data and method used in the calculation of these daily nowcasts see the technical appendix.
(5) Tay (2006) and Andreou, Ghysels & Kourtellos (2012) are the only studies to my knowledge to produce daily nowcasts.
(6) Base effects refer to how annual growth rates can be affected when large single period outcomes are removed from the calculation. In this context it refers to the substantial step-up in annual GDP growth rates in prospect for Q2 as the weak outcomes from the same quarter from 2020 drop out of the annual calculations. Our nowcasts may not accurately account for these base effects.
(7) Nowcasting quarterly GDP growth rates is a neat way to avoid this issue, although these will be more volatile. Given this, and that many readers will be more familiar with annual GDP growth rates, it was decided to focus on the annual rates.