Nowcasting Quarterly <scp>GDP</scp> Growth During the <scp>COVID</scp> ‐19 Crisis Using a Monthly Activity Indicator*

What is happening now? The onset of the COVID‐19 crisis in 2020 highlighted the importance of having timely data on the economy to help policy‐makers make more informed decisions. However, the most comprehensive measure of activity, GDP, is published with a long lag, limiting its value to policy‐makers as a measure of the current state of the economy. To overcome this information deficiency, we develop a monthly activity indicator (MAI) for Australia. The MAI provides policy‐makers with a more immediate snapshot of prevailing economic conditions. We achieve this by using a dynamic factor model to summarise the information content from a curated list of 35 monthly predictors selected for their ability to explain movements in quarterly real GDP growth. We undertake a pseudo out‐of‐sample nowcasting exercise using the MAI in an unrestricted MIDAS model and find that nowcasts based on the MAI significantly outperform standard benchmark models. Crucially, outperformance is largest during the COVID‐19 crisis, emphasising the benefit from considering timely data. Our results demonstrate that the MAI is a useful tool for policy‐makers to gain a better understanding of current economic conditions in Australia.