On the Forecasting Properties of the Alternative Leading Indicators for the German GDP: Recent Evidence

In this paper we perform a comparative study of the forecasting properties of the about 30 alternative leading indicators for Germany using the growth rates of German real GDP. In addition to them, we have constructed a diffusion index based on the principal component analysis and including 145 component series that reflect all the facets of German economy. We use the post-unification data which cover years from 1991 through 2004. Using a battery of statistical tests we detect a structural break in the growth rates that occurs in the first half of 2001. Our results suggest that the forecasting ability of the leading indicators has been rather good in the pre-break period with our diffusion index showing the superior forecasting accuracy but the forecasting performance of all alternative indicators has significantly deteriorated in the post-break period, i.e. in 2001-2004. None of the leading indicator models was able to predict and accommodate the structural break in the growth rates of the time series under scrutiny. This finding confirms the widespread impression among the practitioners that the state of German economy in the recent years became much more difficult to forecast.