Estimation of Flash GDP at T+30 days for EU28 and EA18/EA19 Adam Brown, Cambridge Econometrics Task Force Meeting, Rome, 22 June 2015

Progress since January 2015 Switched methodology from Stata to EViews Estimates for 2014q4 and 2015q1 Back Estimates 2012 and 2013

Switch from Stata to EViews Motivated by ease of transfer of application from CE to Eurostat from 2016 onwards More “hands on” method allows for opportunity for more rigorous econometric analysis and data checking Requires more detailed data preparation in Excel calculating accurately weighted averages This method was discussed with Eurostat (Arto) in April and optimised

Estimates: 2014q4 and 2015q1

Objective Estimate real GDP growth rate for latest quarter at t+30 2014q1, q2 and q3 reported in January. 2014q4 and 2015q1 Geographical Coverage EU28 remains the same EA18 became EA19 on 1st January 2015 Real GDP Growth Year-on-Year (YoY) Quarter-on-Quarter (QoQ) (Seasonally Adjusted)

Data Flash estimates from participating countries changing sample between 2014q1 and 2015q1 2014q4 and 2015q1 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 ESI: composite Economic Sentiment Indicator made up of five confidence indicators manufacturing, construction, services, retail trade, consumers Available on a month by month basis

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

Endogenous / Exogenous Groups Period Countries producing flash estimates EU28 % EU18 % 2014q4 Austria, Belgium, Bulgaria, Czech Republic, Germany, Spain, Finland, Italy, Latvia, Lithuania, Netherlands, Poland, Portugal, Romania, UK 74% 2015q1 Austria, Belgium, Bulgaria, Czech Republic, Germany, Spain, Finland, Italy, Latvia, Lithuania, Netherlands, Poland, Portugal, Romania, UK. 75% Individual estimate for France generated using ARIMAX with country specific ESI Austria, Latvia, Spain and Belgium estimates obtained from NSO

QoQ Growth rate Seasonally adjusted GDP growth rates for 2014q4 YoY Growth rate QoQ Growth rate Seasonally adjusted CE Estimate T+45 Estimate Error EU28 1.2 1.3 -0.09* 0.3 0.4 -0.08 EA18 0.8 0.9 -0.11* -0.03 *0.7% (EU) and 0.9% (EA) error due to Netherlands low t+30 forecast of 0.0% (t+45 was 1.4%)

QoQ Growth rate Seasonally adjusted GDP growth rates for 2015q1 YoY Growth rate QoQ Growth rate Seasonally adjusted CE Estimate T+45 Estimate Error EU28 1.3 1.4 -0.11 0.4 -0.05 EA19 0.8 1.0 -0.17 0.3 -0.15

The t+45 errors for the estimates for 2015q1 are shown below. GDP growth rates for 2015q1 The t+45 errors for the estimates for 2015q1 are shown below. All are negative – this is because France’s flash estimate was not included and France had an unexpectedly good quarter   CE t+30 forecast Official T+45 forecast error EU28 YoY 1.3 1.4 -0.11 EU28 QoQ 0.4 -0.05 EA19 YoY 0.8 1.0 -0.17 EA19 QoQ 0.3 -0.15 Mean error = -0.125% Abs mean error = 0.125%

CE t+30 forecast (with Fr) GDP growth rates for 2015q1 For purposes of comparison, we recalculated our results as if we had had a t+30 flash estimate for France. We see that the errors would have been both significantly smaller in absolute terms and less consistently negative.   CE t+30 forecast (with Fr) Official T+45 forecast error EU28 YoY 1.4 -0.01 EU28 QoQ 0.4 +0.05 EA19 YoY 1.0 -0.04 EA19 QoQ -0.02 Mean error = -0.005% Abs mean error = 0.03%

Back 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

Back Estimates – EU28 CE YoY T+65 YoY Error CE QoQ T+65 QoQ 2012q1 -0.1 -0.04 2012q2 -0.4 0.02 -0.2 2012q3 -0.6 0.0 -0.05 2012q4 -0.7 0.05 -0.3 2013q1 0.07 2013q2 -0.09 0.3 0.4 2013q3 0.2 2013q4 1.0 0.04 2014q1 1.4 0.00 2014q2 1.5 1.3 0.25 0.24 2014q3 1.2 -0.10 2014q4

Back Estimates – European Union

Back Estimates – EA17/18/19 CE YoY T+65 YoY Error CE QoQ T+65 QoQ 0.0 -0.4 0.46 0.3 -0.1 0.45 2012q2 -0.7 -0.8 0.13 -0.2 -0.3 0.12 2012q3 -0.9 0.01 2012q4 -1.0 0.11 2013q1 -1.2 0.20 2013q2 -0.6 -0.21 0.1 -0.22 2013q3 -0.01 0.7 0.2 -0.02 2013q4 0.4 2014q1 0.9 1.1 -0.18 2014q2 0.8 0.10 2014q3 -0.13 2014q4 -0.07 -0.06

Back Estimates – Euro Area

Back Estimates – Revision Analysis European Union: 6+ve revisions, 6 -ve revisions. Mean Revision: 0.00 Mean Absolute Revision: 0.07 eurozone: 6 +ve revisions, 6 –ve revisions. Mean Revision: 0.03 Mean Absolute Revision: 0.14

Back 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 2012-2014 meets this criteria for the European Union but just fails to meet this criteria for the eurozone. European Union: 6+ve revisions, 6 -ve revisions. Mean Revision: 0.00 Mean Absolute Revision: 0.07 eurozone: 6 +ve revisions, 6 –ve revisions. Mean Revision: 0.03 Mean Absolute Revision: 0.14

2012q1 EA17 results CE YoY T+65 YoY Error CE QoQ T+65 QoQ 2012q1 0.02 -0.44 0.46 0.35 -0.10 0.45 The estimation for 2012q1 EA17 was considerably less accurate than subsequent forecasts. The reason for this was the exogenous group estimation itself, which we calculated as 0.33%. The actual value turned out to be -0.10%. This was mainly due to a downgrading of the Italian forecast from -1.0% to -2.3%. This highlights the fact that when the number of countries in the exogenous group is small, the eventual Eurozone t+30 flash estimate is sensitive to errors in the country specific t+30 flash estimates.

Summary Updated methodology from Stata to EViews in order to facilitate transfer to Eurostat Calculated estimates for 2014q4 and 2015q1 Errors in the overall estimate were found to be largely a result of errors in exogenous group individual estimates Performed back estimates for 2012 and 2013 Results suggest that specified quality criteria are realistic and achievable but care must be taken over criterion 2 Moving Forward: Three further estimates to be generated for 2015 quarters 2, 3 and 4

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