Nowcasting the Global Economy

Forecasts of global economic activity and inflation are important inputs when conducting monetary policy in small open economies such as Canada. As part of the Bank of Canada's broad agenda to augment its short-term forecasting tools, the author constructs simple mixed-frequency forecasting equations for quarterly global output, imports, and inflation using the monthly global Purchasing Managers Index (PMI). When compared against two benchmark models, the results show that the PMIs are useful for forecasting developments in the global economy. As the forecasts are updated throughout the quarter with the monthly release of the PMI, forecasting performance generally improves. An analysis of the forecasts over the period of the Great Recession (in particular, 2008Q4 to 2009Q2) shows that, while models that include the "soft" PMI indicators did not fully capture the sharp deterioration in the global economy, they nevertheless improved the forecasts relative to the benchmark models. This finding highlights the usefulness of such indicators for short-term forecasting.