Keeping track of the state of the economy in real time: introducing NIESR’s GDP Tracker

For more than twenty years, following the pioneering work of Martin Weale and our colleagues, NIESR provided the only published estimates of monthly GDP for the United Kingdom.  Starting next Tuesday, 10th July 2018, the Office for National Statistics (ONS) will for the first time publish an official monthly GDP series.  This is an excellent development that will provide official GDP estimates significantly earlier than used to be the case.   It means that on this coming Tuesday GDP data will be available for May, when previously the ONS had published a headline GDP figure for only the three months to March at this point in the data cycle. 

The extra information will be especially useful at the moment as it will help to clarify what is the underlying growth rate following a weather-influenced weak outcome in the first three months of the year.  The NIESR monthly GDP estimates had suggested that the economy grew by 0.2 per cent in the three months ending in May 2018, still partly reflecting a weak picture in March.  Historically these estimates (available here) have provided a good guide to the ONS first estimate of quarterly growth, with average differences of around 0.1 to 0.2 percentage points,  and it will be intriguing to see if this is confirmed by the official estimate.

While the ONS is making a step forward by producing early official GDP estimates, albeit with a two-month lag, many users of economic statistics would also like to know what is happening in the economy now in real time.  If it turns out that the ONS estimate of GDP growth in the three months ending in May is similar to our 0.2% figure then there will still be considerable doubt about the underlying strength of the economy.  It will not be clear whether measured GDP growth over this period is providing a distorted signal because of the temporary effects of snow in March or whether the economy is weak for other reasons that may be more persistent, such as the effects of the ongoing negotiations with the EU that are creating economic uncertainty.  Users of economic statistics, particularly those using them to make policy, are likely to appreciate some guidance on this issue.

Demand for an up-to-date picture, together with the availability of new data sources and sophisticated statistical techniques, has led to the growth of a variety of forms of ‘nowcasting’ carried out by academic researchers, commercial organisations and some central banks.   These nowcasts can help bridge the gap between the publication of the latest official data and what is happening today.  See, for example, Giannone, D., L. Reichlin, and D. Small (2008).

So from Tuesday 10th July, NIESR will start to publish a new monthly GDP Tracker that will build on the ONS initiative by providing a short-term forecast of the ONS monthly GDP series and its main sub-components.   This GDP Tracker will provide each month an estimate of GDP growth in the current and preceding quarter that is consistent with the latest data published by the ONS.  In some months, such as this one, it will provide quarterly GDP growth estimates that are two quarters more recent than those published by the ONS. 

The short-term forecasts that will be incorporated into the GDP Tracker are going to be produced using statistical models of ten sub-components of GDP and will take account of recent trends in the ONS data, consumer and business surveys published by the European Commission, and judgement based on a range of other available information and intelligence.   The historical evidence suggests that this approach is likely to be informative about growth in the months ahead as monthly growth is partly predictable by its own past behaviour – a positive surprise one month is usually partly reversed the following month – and by survey evidence on current business conditions.

But there is known to be a trade-off between timeliness and reliability in the provision of economic statistics and there is clearly a risk that the new ONS monthly GDP data, our GDP Tracker and other nowcasts will do little more than add noise to an already confusing picture.  It is possible that the new monthly data will be volatile, subject to revision and may sometimes give a misleading steer.  That means that policymakers and other users will need to make sure they do not over-react to the latest data, unless it is confirmed by a range of other evidence.

So, in the light of that risk, as well as providing early estimates of GDP growth, the GDP Tracker will be accompanied by a commentary by the Institute on the latest cyclical position of the UK economy drawing on the latest data published by the ONS, together with information from business and consumer surveys and other relevant intelligence.

We believe that the GDP Tracker will be of use to policymakers, businesses and those who hold policymakers to account.  It will have a number of benefits:

• Most clearly it will provide an estimate of economic growth in the economy as a whole and in the key industrial sectors and so provide a guide to how the economy is developing ahead of the publication of official data.  Like the ONS we will tend to focus on the three- month and quarterly growth rates rather than the more volatile monthly changes.
• It will come with an assessment of the reliability of the estimates.  As is well known, GDP estimates are revised over time as new information about a particular period of time is collected.  And the GDP Tracker will be less reliable than the subsequent ONS data releases as its data content is lower, particularly for estimates of the current quarter which in some months will be based only on forecasts rather than hard data.  To mitigate this issue, NIESR will provide a guide to average errors based on past performance.  Initially, as this is a new approach, this assessment will be based on what the GDP Tracker would have hypothetically forecast had it been used in the recent past.  But over time it will be based on actual real time performance.
• It will also provide a measure of the amount of economic news arriving each month.  The GDP Tracker estimates of the current state of the economy will be updated each month as new information becomes available.   It will then be possible to say, for example,  whether the latest ONS estimate of growth in the manufacturing sector was a surprise or not.  This type of information is very helpful in monitoring how the economy is changing relative to what was already expected.

Our aim in publishing the new monthly GDP Tracker is to support the ONS effort to offer a more complete snapshot of the economy.  According to the Bean Review of UK economic statistics, ‘economic statistics are an important public good, critical to policy development, business decisions and democratic accountability’ and that users ‘want timely statistics that are sufficiently accurate, reliably delivered and relevant to their needs’(Bean, 2016).  We hope to contribute to that public good by providing a timely analysis of the current state of the UK economy with our new GDP Tracker.