Can confidence indicators be useful to predict short term real GDP growth?

We investigate the usefulness of the European Commission confidence indicators in forecasting real GDP growth rates in the short-run in selected euro area countries (Belgium, Spain, Germany, France, Italy and the Netherlands) which account for almost 90% of the euro area. We estimate a linear relationship between real GDP and confidence indicators and we compare the forecasting performance of the estimated models with a benchmark ARIMA model. We generally find that confidence indicators can be useful in forecasting real GDP growth rates in the short run in a number of countries (Belgium, Germany, France, Italy and the Netherlands). Notwithstanding some signs of instability in the relationship between confidence indicators and real GDP, improvements with the use of time-varying parameter models appear to be fairly limited but confirm the findings obtained with constant parameter techniques. The results are robust to a wide range of variant tests implemented.