Danmarks Nationalbank has designed a number of nowcast models that are continuously updated. Nowcasting is a contraction of the words now and forecasting.
Many economic measures and key indicators may be subject to some delay in the collection and validation of data. So the latest available data do not necessarily describe the current situation.
Nowcasting attempts to provide as current a picture of the economic situation as possible based on various ‘soft’ indicators, such as confidence indicators, which are typically available ahead of the officialfigures.
The models can, for example, provide a nowcast of economic growth before the national accounts are published. The results of the models do not reflect Danmarks Nationalbank’s growth expectations, but provide a picture of the development in the gross domestic product (GDP) in the current quarter, based on the indicators and key figures becoming available on an ongoing basis before the actual quarterly GDP figure.
Nowcasting and many other factors are elements of the economic growth assessment work. The models have different methodological starting points and represent different methods within the nowcasting field.
Danmarks Nationalbank uses two different nowcast models: the real-time model and the turning point model. The choice of several models adds more facets to the picture of the development, partially taking model uncertainty into account.
The real-time model
The real-time model uses an extensive dataset with a wide range of key economic indicators and other indicators. The model’s forecast for the coming period is based on a simple linear projection of previous periods.
The model is a dynamic factor model which is linear in parameters. The model is based on a model developed by the New York Federal Reserve, a part of the US Federal Reserve system.
In the chart below, you can continuously see how the model’s forecasts are updated with new key economic indicators.
The turning point model
The turning point model is based on a few key economic indicators leading the business cycle. Unlike the real-time model, this model is non-linear in parameters. Instead, the model indicates a distribution of the probability of different outcomes – and not an actual forecast of quarterly GDP.
The turning point model is being developed in partnership with the European Central Bank, ECB, and it helps to identify potential economic turning points more quickly.