Nowcasting Slovak GDP by a Small Dynamic Factor Model

The aim of this paper is to estimate a small dynamic factor model (DFM) for nowcasting GDP growth in Slovakia. The model predicts the developments of real activity based on monthly indicators, such as sales, employment, employers’ health care contributions, export and foreign surveys. The forecast accuracy of the model prevails over naive models that ignore monthly data. This result holds especially on the shortest horizon of one quarter ahead and on the evaluation period including the crisis of 2008-2009. Thus we may conclude that our small DFM is a valuable indicator of business cycle turning points in Slovakia. Further, the model allows for frequent and automatic updates of the GDP forecast each time new monthly data becomes available. This makes it useful for institutions which monitor the developments of monthly indicators of real activity.