Can confidence indicators be useful to predict short term real GDP growth?

Abstract

We investigate the usefulness of the European Commission confidence indicators for forecasting real GDP growth rates in the short run is investigated in selected euro area countries (Belgium, Spain, Germany, France, Italy and the Netherlands) which account for almost 90% of the euro area. A linear relationship between real GDP and confidence indicators is estimated and the forecasting performance of the estimated models compared with a benchmark ARIMA model. It is generally found that confidence indicators can be useful for forecasting real GDP growth rates in the short-run in most of the above-mentioned countries. Notwithstanding some signs of instability in the relation between confidence indicators and real GDP, improvements with the use of time-varying parameter models appear to be fairly limited but confirm the findings obtained with constant parameter techniques. The results obtained are robust to a wide range of variant tests implemented.