A machine learning approach to forecast economic recessions-an Italian case study

In economic activity, recessions represent a period of failure in Gross Domestic Product (GDP) and usually are presented as episodic and non-linear. For this reason, they are difficult to predict and appear as one of the main problems in macroeconomics forecasts. A classic example turns out to be the great recession that occurred between 2008 and 2009 that was not predicted. In this paper, the goal is to give a different, although complementary, approach concerning the classical econometric techniques, and to show how Machine Learning (ML) techniques may improve short-term forecasting accuracy. As a case study, we use Italian data on GDP and a few related variables. In particular, we evaluate the goodness of fit of the forecasting proposed model in a case study of the Italian GDP. The algorithm is trained on Italian macroeconomic variables over the period 1995:Q1-2019:Q2. We also compare the results using the same dataset through Classic Linear Regression Model. As a result, both statistical and ML approaches are able to predict economic downturns but higher accuracy is obtained using Nonlinear Autoregressive with exogenous variables (NARX) model.