As now estimated by DNB, Gross Domestic Product (GDP) grew by 0.2 per cent on a quarterly basis from July through to September. For October through to December, recent data points to a slight contraction of 0.1 per cent. Like any economic forecast, this estimate is subject to a margin of uncertainty. Judging by the past, a margin of uncertainty of 0.3 percentage point should be borne in mind, but this may be rather low given the current uncertain climate.
Economic growth coming to halt in second half of year
|Date||8 November 2011|
In the first half of 2011, the Dutch economy grew by on average 0.5% quarter-on-quarter. According to currently available data, growth will virtually come to a halt in the two last quarters. This emerged in forecasts using DFROG, DNB’s new model for GDP growth in the short term.
Decline in equity prices
According to the model, the expected softening of economic growth can be largely attributed to the slump in European stock markets, declining consumer and producer confidence and rising unemployment (Charts 1 and 2).
The Eurostoxx index, an index of the fifty largest listed corporations in the euro area, declined by 26 percent in the third quarter. This decline weighs heavily in the forecast for economic growth in the latter half of the year. Stock market sentiment has been depressed since the start of the summer, one reason being the persistent concerns about the debt crisis. In contrast, a slight economic recovery was seen earlier this year. Consumer and producer confidence increased too. But bad news piled up in the summer. The global economy slipped back into a lower gear, as reflected in, among other factors, the stagnation of growth in world trade. Weakening demand drove up unemployment during the summer months. At the same time, Dutch consumer and producer confidence caved in. Consumer confidence is now even lower than before the economy went into free fall at the end of 2008.
DNB uses the DFROG model to consistently convert the available latest data into a statistical forecast of economic growth in the current quarter. Such a forecast is needed particularly during a crisis or in a period of great uncertainty. However, the hard, official growth figures on gross domestic product – economic growth – are only released every quarter, and even then with a considerable lag after the end of that quarter. The first GDP growth figure for the third quarter, for example, is released on 15 November. Policymakers and analysts try to get around this by following other economic indicators such as consumer confidence and industrial production. But deriving a clear picture of economic growth from this flow of data is no easy task, particularly because the signals are often conflicting. Moreover, there is no simple calculation for adding up or subtracting the figures. After all, how can a confidence rate be combined with an industrial output rate? And do three green lights weigh up against one red one?
Quick estimate of quarterly growth
De Nederlandsche Bank uses a new statistical model (DFROG). With this model, the signals from 80 commonly-used national and international indicators can be converted into a single quarterly growth rate. A major benefit is that this model facilitates a reliable estimate of GDP growth in the current quarter. And that is a pure gain for policymakers and analysts who are in need of the latest growth figures. This article incorporates the data as they were known on 2 November last.
DFROG, a dynamic factor model, is able to give a good estimate of quarterly GDP growth, especially during recessions. The model is constructed for short-term forecasts. DNB uses this model for monitoring cyclical development and for GDP growth forecasts in the previous and the current quarter. For a broader and longer view, DNB uses the macro-econometric model DELFI. DNB uses DELFI in drawing up economic forecasts for the next one to two years.
DFROG’s forecasting performance has been compared to a number of other commonly-used statistical approaches and the forecasts of professional analysts. DFROG appears to be better than the other analysed methods in forecasting GDP growth in the short term, especially in the run-up to and during recessions. A recent research report by DNB deals with this topic in more depth.