Nowcasting GDP growth in a small open economy

Nowcasting, that is, forecasting the current economic conditions, is a key ingredient for decision making, but it is complex, even more so for a small open economy, due to the higher volatility of its GDP. In this paper, we review the required steps, taking Luxembourg as an example. We consider both standard and alternative indicators, used as inputs in several nowcasting methods, including various factor and machine learning models. Overall, mixed frequency dynamic factor models and neural networks perform well, both in absolute terms and in relative terms with respect to a benchmark autoregressive model. The gains are larger during problematic times, such as the financial crisis and the recent Covid period.