Nowcasting real economic activity in the euro area : Assessing the impact of qualitative surveys

Working Paper N° 331

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This paper analyses the contribution of survey data, in particular various sentiment indicators, to nowcasts of quarterly euro area GDP. It uses a genuine real-time dataset that is constructed from original press releases in order to transform the actual dataflow into an interpretable flow of news.
The latter is defined as the difference between the released values and the prediction of a mixedfrequency dynamic factor model.
Our purpose is twofold. First, we aim to quantify the specific value added for nowcasting GDP from a set of heterogeneous data releases including not only sentiment indicators constructed by Eurostat, Markit, the National Bank of Belgium, IFO, ZEW, GfK or Sentix, but also hard data regarding industrial production or retail sales in the aggregate euro area and individually in some of the largest euro area countries. Second, our quantitative analysis is used to draw up an overall ranking of the indicators, on the basis of their average contribution to updates of the nowcast.
Among the survey indicators, we find the strongest impact for the Markit Manufacturing PMI and the Business Climate Indicator in the euro area, and the IFO Business Climate and IFO Expectations in Germany. The widely monitored consumer confidence indicators, on the other hand, typically do not lead to significant revisions of the nowcast. In addition, even if euro area industrial production is a relevant predictor, hard data generally contribute less to the nowcasts: they may be more closely correlated with GDP but their relatively late availability implies that they can to a large extent be anticipated by nowcasting on the basis of survey data and, hence, their ‘news’ component is smaller. Finally, we also show that, in line with the previous literature, the NBB’s own business confidence indicator appears to be useful for predicting euro area GDP. The prevalence of survey data remains also under a counterfactual scenario in which hard data are released without any delay. This finding confirms that, in addition to being available in a more timely manner, survey data also contain relevant information that does not seem to be captured by hard data.