Forecasting Growth of Australian Industrial Output Using Interest Rate Models

We examine the ability of short rates and yield spreads to forecast the growth in Australian industrial output. We find that since 1990, the short rate has a significant increase in its predictive power for forecasting output growth in many industries. We document this increase. The yield spread, on the other hand, is useful in predicting the growth of industries with a `longer' production cycle, such as manufacturing and wholesale trade. Hence, the predictive power of the yield spread on total GDP, is mainly from its ability to forecast these industries. Our out-of-sample forecasts show that yield spread is a good forecasting device for many industries, particular for output growth over longer horizons.