Flow of conjunctural information and forecast of euro area economic activity

Euro area GDP and components are nowcast and forecast one quarter ahead. Based on a dataset of 163 series comprising the relevant monthly indicators, simple bridge equations with one explanatory variable are estimated for each. The individual forecasts generated by each equation are then pooled, using six weighting schemes including Bayesian ones. To take into consideration the release calendar of each indicator, six forecasts are compiled independently during the quarter, each based on different information sets: different indicators, different individual equations and finally different weights to aggregate information. The information content of the various blocks of information at different points in time for each GDP component is then discussed. It appears that taking into account the information flow results in significant changes in the weight allocated to each block of information, especially when the first month of hard data becomes available. This conclusion, reached for all the components and most of the weighting scheme, supports and extends the findings of Giannone, Reichlin and Small (2006) and Banbura and Rünstler (2007). An out-of-sample forecast comparison exercise is also carried out for each component and GDP directly. The forecast performance is found to vary widely across components. Two weighting schemes are found to outperform the equal weighting scheme in almost all cases. One-quarter ahead, the direct forecast of GDP is found to outperform the bottom-up approach. However, the nowcast resulting in the lowest forecast errors is derived from the bottom-up approach. JEL Classification: C22, C53, E17