Traditional nowcasting has served its purpose well, but the COVID-19 crisis proved a challenge for typical nowcasting models. Today’s next-generation nowcasting approach reduces the number of variables for more accurate outcomes and making it easier to interpret estimates, understand structural breaks, and provide up-to-the-moment information.
When the COVID-19 pandemic hit, many government, financial, and other institutions, hoping to capture the rapid economic shifts taking place around the world, turned to nowcasting for answers. While traditional nowcasting has often served its purpose well—letting institutions know where they stand at the moment—it has also faced unique challenges during major unforeseen events such as the COVID-19 crisis, Brexit, and the US–China trade war, all of which created significant macroeconomic structural breaks in many of the relationships between economic indicators.
Today’s approach to nowcasting should be revamped. This new approach to nowcasting makes it easier to interpret estimates, understand structural breaks, and provide up-to-the-moment information – ultimately supporting better critical decision making and strategy moving forward.
This article was originally published on McKinsey.com on May 20, 2021, and is reprinted here by permission.
