Melbourne Institute Working Paper Series Database (1984 - 2010)

Melbourne Institute Working Paper No. 03/2008

Can Consumer Sentiment and Its Components Forecast Australian GDP and Consumption?

by

Chew Lian Chua and Sarantis Tsiaplias

Date: February 2008

Abstract: This paper examines whether the disaggregation of consumer sentiment data into its sub-components improves the real-time capacity to forecast GDP and consumption. A Bayesian error correction approach augmented with the consumer sentiment index and permutations of the consumer sentiment sub-indexes is used to evaluate forecasting power. The forecasts are benchmarked against both composite forecasts and forecasts from standard error correction models. Using Australian data, we find that consumer sentiment data increases the accuracy of GDP and consumption forecasts, with certain components of consumer sentiment consistently providing better forecasts than aggregate consumer sentiment data.

 

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