Nowcasting Economic Activity using Large-Scale Dynamic Factor Models with Regional Block-Structure: An Application for the Austrian Economy

Publication delays of macroeconomic data, like Quarterly National Accounts figures, make it difficult to assess the state of the economy in real time. Nowcasts of, for example, quarterly GDP can mitigate this issue. We propose a hierarchical three-stage dynamic factor model with regional blocks, which will be used for nowcasting both Austrian quarterly national and regional economic activity. In the model the business cycle dynamics are defined not only by common, but also by block-specific factors. These factors are in the first stage related to a certain region, and in the second stage defined with respect to the region's main sectoral predominance. Using this block-structure approach we are able to exploit the full range of the comprehensive dataset, including not only national and international data, but also a high number of regional indicators. Having obtained the model we evaluate its forecasting performance for national GDP by looking at its pseudo out-of-sample forecasts.