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

2. 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.

3. 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.

4. 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)

5. 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?

6. 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.

7. 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.

8. 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.