Nowcasting Quarterly GDP Growth during the COVID-19 Crisis Using a Monthly Activity Indicator

Luke Hartigan and Tom Rosewall

No 2024-15, Working Papers from University of Sydney, School of Economics

Abstract: What is happening now? The onset of the COVID-19 crisis highlighted the importance of having timely data on the economy to help policymakers make more informed decisions. However, the most comprehensive measure of activity, GDP, is published with a long lag, thereby limiting its value to policymakers as a measure of the current state of the economy. To overcome this information deficiency, we develop a monthly activity indicator (MAI) for Australia. The MAI aims to provide policymakers with a more immediate snapshot of prevailing economic conditions. We achieve this by using a dynamic factor model to summarise the information content from a curated list of 30 monthly predictors selected for their ability to explain movements in quarterly real GDP growth. We undertake a pseudo out-of-sample nowcasting exercise using the MAI in an unrestricted MIDAS model and find that nowcasts based on the MAI significantly outperform standard benchmarks. Crucially, outperformance is largest during the COVID-19 crisis, emphasising the benefit from considering monthly data. Our results demonstrate that the MAI is a useful tool for policymakers to gain a better understanding of current economic conditions in Australia.

Keywords: COVID-19; dynamic factor model; forecast evaluation; GDP growth; MIDAS regression; nowcasting; real-time data (search for similar items in EconPapers)
Date: 2024-07
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Working Paper: Nowcasting Quarterly GDP Growth during the COVID-19 Crisis Using a Monthly Activity Indicator (2024)
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