Unlocking the crystal ball: Deciphering recessions through dynamic relationships among leading indicators in Sweden

Abstract: Forecasting economic recessions has been a major topic of interest for economists, decisionmakers and the public alike. In this study we ventured to analyse how changes in economic output or GDP is related to changes in consumer sentiment and house prices in the Swedish economy. For the purpose we employed simple vector autoregression (VAR) methodology that has the benefit of modelling dynamic relationships across time. Our results indicated that consumer sentiment, measured by Consumer Confidence Index, and housing prices, measured by the Housing Index, are indeed related to GDP meaning that these variables can be used for forecasting GDP and potentially be indicative of imminent recessions. Overall, this study contributes to the body of knowledge on economic forecasting and VAR methodologies.