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OECDApril 16th , 2019
Nowcasting
Lucrezia ReichlinLondon Business School and Now-Casting Economics Ltd
What is now-casting ?
Contraction of the terms Now and Forecasting
Meteorology Now-casting forecasting up to 6-12 hours ahead long tradition, since 1860
Economic Now-casting forecasting the near future, the present and even
the recent past
Ahead of the policy meeting Recent ….
“Draghi says no recession ahead for Euro area despite weakness”
Euro area GDP quarterly growth rate and last revisions
Strong growth in 2018 [large revisions]Weakening since 2017q3
Did we see it coming?Evolution of views on 2017 – euro area
Did we see it coming?Evolution of views on 2017 – Italy and Germany
Italy Germany
Did we see it coming?Evolution of views on 2018 – euro area
But the problem is not just GDP … markets and policy institutions are intetested in tracking the entire data flow ....Action follow the ”news” …
→→ How do markets think?
Thinking ….
A broader definition of now-casting ….
• An algorithm which can read data in real time and in a coherent framework so as to obtain a timely estimate of the current sttae of the economy
• The idea is to mimick market behaviour by a formal model
The Now-Casting approach
• Our objective is to track the real time data flow, using a single, coherent framework
• We want to model jointly all relevant data – potentially many using a parsimonious model
• And we want to update the model every time there is a new data release … or whenever there is ‘news’ in the data flow …
• The approach is entirely model based – free of judgment
Gross Domestic Product (GDP)
Manufacturing Turnover
Industrial Production
Construction
Trade
Retail Sales
Unemployment
Consumer Confidence Survey
Purchasing Managers Index
Business Climate Survey
April May June July August
Published (date)
Non-standard problem: the series not synchronised, with different frequencies
Gross Domestic Product (GDP)
Manufacturing Turnover
Industrial Production
Construction
Trade
Retail Sales
Unemployment
Consumer Confidence Survey
Purchasing Managers Index
Business Climate Survey
April May June July August
Published (date)Refers to (period)
Non-standard problem: the series not synchronised, with different frequencies
NCI™
* NEWS *
Model forecasts Factor update
Model run
The Now-Casting platform
Model forecasts
Real time data vintages
GDP now-cast
Other series now-casts
New data release
Calendar of data releases
Desiderata from model
1. Read a large number of data releases – parsimony [factor models, shrinkage …]
2. Update in relation to non-synchronous data releases [Kalman filter, …]
3. Mixed frequency [EM algorithm, …] 4. Dynamic and multivariate to be able to track “news”
• Standard is from Giannone, Reichlin and Small, 2008 and related literature. Many applications in central banking and private institutions
• Recent advances both on methods and data sources
Where are we now?GERMANY: Q2-2019
22 March
March 22Negative shock from PMI relating to March
What have we learnt in 7 years of real-time experience?
• Timeliness matters, and nowcast precision increases when new data arrives
• Surveys are very important in the beginning of the quarter
• On average our performance is similar to the one of professional forecasters, regarding GDP and other real variables
The forecast error within the quarter
00.10.20.30.40.50.60.70.80.9
1
F N B
Euro Area
ar dfm BB FF EC0
0.2
0.4
0.6
0.8
1
1.2
1.4
F N B
Germany
ar dfm BB FF EC
0
0.2
0.4
0.6
0.8
1
1.2
F N B
Italy
ar dfm BB FF EC0
0.10.20.30.40.50.60.70.8
F N B
France
ar dfm BB FF EC
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
F N B
UK
ar dfm BB FF NIESR EC0.2
0.3
0.4
0.5
0.6
0.7
F N B
US
ar dfm BB FF SPF
0.20.40.60.8
11.21.41.61.8
22.2
F N B
Japan
ar dfm BB JCER0
0.51
1.52
2.53
3.54
F N B
Brazil
ar dfm BB BCB
The forecast error within the quarter
Other output from the model
From the model we can extract a coincident indicator (NCI) and news index
News index can be related to financial variables:-- forecasting-- portfolio strategies
• Timeliness matters! The real-time analysis if very important – there is a cost to be late
• What matters are the forecast errors and the possibility to interpret them in order to understand what is happening to the economy
• Automatic models can perform as well as professional forecasters
• Macroeconomic surprises have an impact on the markets at a low frequency
Lessons from the now-casting experience
END
