How to use nowcasting techniques to beat the queue in a world of fast data?
December 18, 2020
What is the state of the UK economy right now? How much of the lost economic output has been recovered? It has never been more important to have timely answers to these questions. Official GDP data from the Office for National Statistics (ONS) often comes with a time lag. And that is where fast data comes in.
How might nowcast help?
Recognising the need for more timely data on the UK’s economic performance, we developed a nowcasting model to predict monthly GDP - a data hungry econometric model that uses fast data to enable forecasting the ‘now’.
In our most recent UK Economic Update we published for the first time our predictions of UK monthly GDP growth for the last three months of 2020, in advance of the ONS official estimate. Our model helps to bridge the near-term prediction gap.
With an estimate of monthly GDP as it happens, nowcasting predictions can provide businesses and policymakers with a richer understanding of the impact of the pandemic and policy interventions on the economy, thereby better informing subsequent policy and investment decisions.
Nowcasting models focus on predicting the current situation as accurately as possible and can be used to inform short-term projections, i.e. for the upcoming few months. We note that they are less useful for long-term forecasting, given their reliance on real-time fast data.
How does nowcast perform?
Our nowcasting prediction for month-on-month real GDP growth for October was 0.36%. This is aligned to the ONS’ preliminary GDP estimate published one month later of 0.4%.
We constantly refine our prediction when new data comes out. Figure 1 shows the development of our nowcasting prediction for October over the course of a month. Although it appears that our nowcast prediction remains relatively unchanged, there have been some important dynamics which altered the estimate as new data was released.
Figure 1: Changes in PwC's nowcasting prediction for October between our first estimate on 12/11/2020 and our revised estimate on 11/12/2020
The key driving factors underpinning the development of our October predictions were:
- Inclusion of new Google mobility data, which aims to measure the impact of pandemic on people’s mobility. This indicator is particularly useful when predicting the real-time movement of the economy in such unprecedented times. They have contributed to a 0.1 percentage points downward revision of the October prediction.
- Stronger than expected retail sales growth. Retail sales grew by 0.1% in October, stronger the previously estimated. Therefore, we revised our nowcast prediction upwards by 2 percentage points.
- Lower than expected changes in government deficit (i.e. current receipts minus current expenditure). This is mainly driven by higher tax receipts due to higher levels of production and consumption. As a result, we have revised our prediction upward by 0.5 percentage points.
- Lower than expected growth rate of mortgage lending. Following a rapid increase in lending after the reopening of the economy, the property market has cooled down faster than expected as the country entered its second lockdown. Our nowcasting projection was revised down by 0.5 percentage points as a result. This data point came in rather late in the month and offset some of the initial increase by previous drivers.
What about now?
Turning our focus to this month’s outlook, the two figures below show how the nowcast model has driven the revisions of our estimate for December real GDP growth rate.
Figure 2a: Changes in PwC's nowcasting prediction for December between our first estimate on 12/11/2020 and our revised estimate on 11/12/2020
Figure 2b: Magnified version of Figure 2a to show the smaller impacts
Back in mid-November, the model predicted a 0.3% monthly GDP growth rate for December which has since been revised to 4.8%. This illustrates how important it is to continuously refine our predictions as new data comes in. This upward revision is mainly attributed to a series of developments, for example:
- Easing of lockdown rules. Switching to a local restriction tier system means the parts of the country with less restrictive rules could see some level of recovery from the national lockdown in November in England. In our model, this is largely being reflected by higher than expected Google mobility movements for the first 10 days of December, indicating a higher level of economic activity across the country.
- Lower than expected changes in industrial confidence in November which has a knock on effect on activity and confidence in December, which contributed to a slight downward revision of our December nowcast.
What next?
Throughout December, we will constantly update our nowcast predictions as soon as important data comes in. Whilst this can be computationally demanding, the benefits to policy makers, businesses and wider audiences lie in having access to timely and relatively accurate predictions of key economic indicators in the near term, so that they can plan more effectively for the future.
We have focused on GDP estimates in this article, but there are also a range of other possible applications of nowcasting techniques, for example in estimating sectoral GVA and industry sales. The ability to produce high frequency predictions in such a wide variety of contexts makes nowcasting a powerful tool, placing us among a handful of organisations who have the capacity to offer bespoke and comprehensive forecasting service to our clients.
Going forward, we will keep this blog live with monthly nowcast predictions updated in real time. So, please revisit our website to get the most up-to-date predictions of the UK economy performance as it enters a new chapter.