Navigating the “twin titans” of global manufacturing: The impact of US and China on industrial production forecasting in G20 nations

Abstract

This study shows the influence of the US and China, the world's manufacturing powerhouses, over the performance of the manufacturing sector of G20 countries from the lens of forecasting. Building upon the Bayesian Additive Regression Tree (BART) with Vector autoregression (VAR) and Stochastic Volatility (SV) augmentations, the study forecasts the IPI (Industrial Production Index) of G20 countries and checks whether the addition of US or China data results in any superior forecast. Initial findings highlight a significant interconnectedness between the IPIs of the US and China and those of G20 nations. The empirical findings suggest an increase in the forecast accuracy of many member nations' IPI with the addition of US and China's data for both point and density forecasts. Furthermore, US data offer an overall advantage in the forecast, particularly for developed economies. China's influence is primarily observed in nations where it maintains robust trade relationships. The study provides valuable insights into the dynamics of global manufacturing. It highlights the importance of considering the role of major players such as the US and China when making predictions about future trends.