RDP 2000-02: Forecasting Australian Economic Activity Using Leading Indicators 4. Conclusion

The aim of this paper is to assess whether three leading indices for Australia, the WM index, the NATSTAT index, and the ABS index, can contribute to forecasts of activity variables. Our interest is in forecasting the levels of the variables themselves, rather than turning points, over a two-year horizon. While there is within sample evidence that all three indices predict real GDP, employment and unemployment, out of sample evidence is less favourable. Our results, based upon simple two variable VAR models, suggest that of these indices, only the WM index provides additional information for forecasting relative to the history of the activity variable itself. And this is confined to forecasts of real GDP. Forecasts of employment and unemployment are generally not improved upon by inclusion of any of the three leading indices.

As a secondary concern, we also compare the forecasts for real GDP from the simple two variable VAR models with a single equation model of Australian GDP presented in Gruen and Shuetrim (1994). Generally, the VAR models do not perform as well as the GS equation. Nonetheless, there is some evidence to suggest that simple time series models using the WM index, if carefully specified, may provide forecasts of comparable quality to other available forecasts.