Estimation of Flash GDP at T+30 days for EU28 and EA18/EA19 Ben Gardiner, Adam Brown Cambridge Econometrics Task Force Meeting, Luxembourg, 07 October 2015

Contents Progress since previous meeting 2015q2 estimation Review of all estimations so far Looking forward

Progress since June 2015 Estimates for 2015q2 calculated Ongoing Management of Portal Econometric Advice to Taskforce Members

Quarterly Estimates for 2015 Estimate real GDP growth rate for latest quarter at t+30 2015q1 reported in June 2015q2 estimate calculated in August – will now be presented 2015q3 still to be calculated

Data Flash estimates from participating countries changing sample between 2014q2 and 2015q2 2015q1 and 2015q2 participatory group actually remained constant Historic GDP used for growth rate time series Seasonally adjusted GDP at market prices, millions of euros, chain-linked volumes, reference year 2010, using ESA 2010 methodology Previous year’s annual current price GDP levels used for weightings of composite growth rates GDP: 1963Q1- most recent quarter preceding forecast ESI: composite Economic Sentiment Indicator made up of five confidence indicators manufacturing, construction, services, retail trade, consumers ESI: 1985M01- most recent month

Real GDP (YoY) - Estimation Methods Sample-to-Population Estimator Assumes sample (participating Flash GDP countries) is good representation of the EU28 or EA18 (population) Issues about reliability of sample size ARIMAX Endogenous: Real GDP YoY growth rate of population Exogenous: ESI of EU28 and EA18 respectively Ignores flash estimates but can be run as soon as ESI available ARIMAX on Residual (Population – Sample) GDP Combines the two approaches Best of both worlds…

ARIMAX on Residual GDP Divide EU28 and EA18/19 into two groups: Those who provide flash estimate: “Exogenous” group: Calculate group growth rate using weighted averages of the individual countries Those who do not provide estimate: “Endogenous” group Estimate growth rate of Endogenous group as a whole using ARIMAX Dependent variable: YoY growth rate of endogenous group 1st Independent variable: YoY growth rate of exogenous group 2nd Independent variable: weighted ESI of endogenous group Check for time series stationarity and variable significance Exact AR/MA specification selected using Schwartz Criterion, model with lowest (most negative) value selected

Exogenous Group Fifteen countries provided t+30 estimates: Period Countries producing flash estimates EU28 % EA19 % 2015q2 Austria, Belgium, Bulgaria, Czech Republic, Germany, Spain, France, Italy, Latvia, Lithuania, Netherlands, Poland, Portugal, UK. 88% 93% Austria, Latvia, Spain and Belgium estimates obtained from NSO

The t+45 errors for the estimates for 2015q2 are shown below. GDP growth rates for 2015q2 The t+45 errors for the estimates for 2015q2 are shown below.   CE t+30 forecast Official T+45 forecast Official T+60 forecast T+45 error T+60 error EU28 YoY 1.79 1.6 1.9 0.19 -0.11 EU28 QoQ 0.44 0.4 0.05 0.04 EA19 YoY 1.41 1.2 1.5 0.21 -0.09 EA19 QoQ 0.34 0.3 -0.06

All Estimates Data became available for flash estimates from 2012q1 to 2013q4 Calculations were therefore carried out for EU28 and EA17/18 areas over this time period Combined with the 2014 and 2015 data already calculated, we now have 14 quarters of data

Flash Estimates – European Union

Flash Estimates – euro Area

Flash Estimates – Revision Analysis YoY European Union: 7 +ve revisions, 7 -ve revisions. Mean Revision: 0.06 Mean Absolute Revision: 0.12 eurozone: 7 +ve revisions, 7 –ve revisions. Mean Revision: 0.05 Mean Absolute Revision: 0.13

Flash Estimates – Revision Analysis QoQ European Union: 7+ve revisions, 7 -ve revisions. Mean Revision: 0.01 Mean Absolute Revision: 0.08 eurozone: 7 +ve revisions, 7 –ve revisions. Mean Revision: -0.01 Mean Absolute Revision: 0.12

Flash Estimates – Revision Analysis Quality Criteria 1 and 2: 1. T+30 should be an unbiased estimate of GDP growth at T+45, with an average revision between -0.05 and 0.05, and no more than 66.7% of revisions in the same direction. The revision data for 2012-2014 meets this criteria. 2. The average absolute revision for T+30 GDP growth should be within 0.10 ppt compared with T+45 GDP growth estimate, and 0.13 ppt compared with T+65 GDP growth estimate. The revision data for just fails to meet this criteria. European Union: 7+ve revisions, 7 -ve revisions. Mean Revision: 0.01 Mean Absolute Revision: 0.08 eurozone: 7 +ve revisions, 7 –ve revisions. Mean Revision: -0.01 Mean Absolute Revision: 0.12

Summary and moving forward ARIMAX procedure has advantages: quick and efficient to produce limited requirement for additional data (no deadline issues) But also has some disadvantages: coping with unexpected changes (future like the past) ensuring sufficient sample size (both no. of MS + time periods) Overall performance of ARIMAX Partly meets quality criteria not really subjected to a period of significant turbulence Moving forward… One further estimate to be generated for 2015 quarters Going live in 2016q1 (hopefully)

Any Questions?

AIC vs. Schwarz Critetion AIC: -2*ln(likelihood) + 2*k Shwarz: -2*ln(likelihood) + ln(N)*k At relatively low N (<7), Shwarz is more tolerant of more parameters. At high N AIC is more tolerant of more parameters. Most of the time they agree