{"id":8215,"date":"2020-06-02T08:26:00","date_gmt":"2020-06-02T07:26:00","guid":{"rendered":"http:\/\/www.economicsobservatory.com\/question\/how-can-we-measure-what-happening-economy-now"},"modified":"2021-01-15T11:28:08","modified_gmt":"2021-01-15T11:28:08","slug":"how-can-we-measure-what-happening-economy-now","status":"publish","type":"question","link":"https:\/\/www.economicsobservatory.com\/test\/how-can-we-measure-what-happening-economy-now","title":{"rendered":"How can we measure what is happening in the economy now?"},"content":{"rendered":"

Economists have developed a toolbox of analytical approaches to produce estimates of what is happening in the economy now and in the recent past (as well as forming a view of where it is going in the near future). This is typically referred to as \u2018nowcasting\u2019 \u2013 a contraction of \u2018now\u2019 and \u2018forecasting\u2019, building on a long history of economic forecasting.<\/p>\n

These methods are widely used by governments, central banks and the private sector \u2013 but how useful are they in the current context?<\/p>\n

In short, they could be very useful, providing the first insights into how changes in a huge range of available economic indicators translate into changes in GDP. Such methods can potentially be applied to other important variables, such as inflation and unemployment. But there are some caveats.<\/p>\n

What does evidence from these models tell us about the economy at the moment?<\/h3>\n

In the context of measuring the current state of the economy, we define \u2018nowcasts\u2019 as estimates of current quarter growth produced in the very same quarter.<\/p>\n

The Treasury summarises the estimates from a series of key forecasters in its regular \u2018Forecasts for the UK economy: a comparison of independent forecasts<\/a>\u2019 publication. We can see in Figure 1, using data published on 17 June, that there is a consensus that the UK economy got smaller in the second quarter of 2020 (April to June), with most estimates falling somewhere in the range from \u201315% to \u201320%. The expectation is that the UK economy will return to growth in Q3 (July \u2013 September), with estimates typically in the range 8\u201315%.<\/p>\n

Figure 1: Nowcasts of 2020 Q2 and Q3 growth estimates from a range of providers<\/h4>\n

\"Graph<\/p>\n

Note: JP Morgan forecast is the seasonally adjusted annual rate (SAAR).
\nSource: HM Treasury<\/em><\/h5>\n

The UK went into lockdown in the final week of March \u2013 and we know from preliminary data from the Office for National Statistics (ONS) that the economy contracted by -5.8% in March<\/a> alone, with large parts of the economy beginning to shut down. Subsequent survey data have suggested that economic activity dropped substantially in April and continued to do so in May \u2013 for more detail, see the latest ONS business survey data here <\/a>and a summary of the latest economic data (published 27 May) here<\/a>.<\/p>\n

The National Institute of Economic and Social Research (NIESR) started producing nowcasts of monthly GDP in 2004 and continues to produce monthly GDP estimates and current quarter projections<\/a>.<\/p>\n

The Bank of England produces nowcasts of the UK economy (see Bell et al<\/a>, 2014; and Anesti<\/a>, 2017) and it has developed similar nowcasting capacity for the world economy (see Kindberg-Hanlon and Sokol<\/a>, 2018), but it does not routinely publish these. Nonetheless, the estimates for the second quarter in Figure 1 are consistent with modelled scenarios of the effect of the lockdown on the UK economy in the second quarter produced by the Office for Budget Responsibility<\/a> and the Bank of England<\/a>.<\/p>\n

Technically, these are not forecasts though: instead, they consider the effect of an immediate three-month lockdown followed by a return to normal over the following three months. NIESR produces a full-blown forecast every quarter that provides a density forecast of the economy for May 2020<\/a>.<\/p>\n

There are also a number of nowcasts available from commercial services, such as Now-Casting.com<\/a>, the Federal Reserve Bank of Atlanta\u2019s GDP Now<\/a> and the NY Federal Reserve\u2019s GDP Nowcast (see Bok et al<\/a>, 2018).<\/p>\n

The table below highlights some other nowcast estimates, including those based on surveys of professional forecasters.<\/p>\n

Table 1: Nowcast estimates (as available at 24\/05\/2020)<\/h4>\n

\"Table<\/p>\n

All of these estimates are for a sharp contraction in activity in Q2 2020.<\/p>\n

A variation of nowcasting has been some work by a team at the Economic Statistics Centre of Excellence (ESCoE, which is funded by the ONS and based at NIESR), which models GDP growth in the regions and nations of the UK. The researchers use nowcasting methods to explore how UK GDP growth in a given quarter could be allocated across the UK. You can read about their model here <\/a>and get their data here<\/a>.<\/p>\n

Table 2:\u00a0Regional GDP growth: Q1 2020 and year to Q1 2020<\/h4>\n

\"Table<\/p>\n

Source: Economic Statistics Centre of Excellence<\/a><\/em><\/h5>\n

What does the evidence tell us about nowcasting and short-term forecasting models?<\/h3>\n

Most economic forecasts come from one of two broad families of approaches: first, detailed models attempting to explain the operation of the economy (known as \u2018structural models\u2019); and second, (\u2018reduced form\u2019) statistical models, which perform well in forecasting but do not have the same ability to provide an economic narrative alongside their forecasts.<\/p>\n

Here we focus on the statistical models as these have become popular in recent years. The models have particularly benefited from methodological advances that now enable them to incorporate a huge array of variables and data.<\/p>\n

The 2008\/09 global financial crisis provides a useful test case for many of these models. Replicating the real-time flow of information through that period sheds light on how these models would have performed at the time. From these studies, we have learned that:<\/p>\n