PFTAC GDP Compilation and Forecasting Workshop Forecasting components of GDP Suva, Fiji October 20, 2016

Forecasting components of GDP The first step is to find indicators. Time series models can be developed subsequently. Know what the data is measuring Always plot the data in levels and growth rates … with leads and lags if it makes sense … and moving averages Plot the components of GDP as percent of total GDP—the structure of the economy (e.g. the relative size of industries for GDP(P) and of sectors for (GDP(E)) usually only changes slowly.

Find stable relationships of the component to forecast with other variables Find external forecasts, e.g. consensus forecasts, IMF, World Bank, population projections The Pacific produces tuna, the IMF and World Bank only forecast the price of salmon. Tuna and salmon are substitutes—prices are expected to move together over time. World commodity prices lead import prices. It takes time for imports to arrive in the Pacific. World price of cotton may be a leading indicator for textile prices.

Find stable relationships of the component to forecast with other variables Find leading indicators Cement imports Building permits Private sector credit Business sentiment Job ads Mining permits Cruise ship table time Weather patterns (southern oscillation index)

Decompose the series to forecast Example: Exports of services Exports of services mainly consist of tourism spending. Tourism spending = Number of tourist arrivals * average number of days stayed * average daily spending per tourist Grow average daily spending per tourist by CPI for nominal forecasts For long-run forecasts: Use population projections for Australia, New Zealand?

Decompose the series to forecast Example from balance of payments: Remittances of seasonal workers Remittances = Number of seasonal workers * hours worked per week * weeks worked * after- tax hourly wage The number of seasonal workers is a function of the total number of seasonal workers under the scheme and the country’s uptake of the scheme.

Find patterns in the data Stable ratios, shares Example: Imports of services mainly consist of transport and storage. Imports of services are expected to be correlated with imports of goods. Growth rate fluctuates around a constant level. Ratios, shares, growth rates gradually return to long-run averages over time.

Use the last period outcome … if everything fails. E.g. exchange rates, some components of the balance of payments Inflate for long-run nominal forecasts if needed.