Short-term forecasts of Economic Growth for Nigeria using the Average Centered Penalized Regression Method

Abstract in this study, we predicted ten (10) quarterly economic growth rate represented by RGDP the presence of multicollinearity and outliers. We employed the average centered penalized regression techniques comprising of LASSO, ridge and elastic net method to quarterly data from 1986 to 2021 obtained from the Central Bank of Nigeria. Consequently, the predictive power for the fitted LASSO, ridge and elastic net penalized least square model using RMSE were revealed to be 0.2895, 0.3197 and 0.2979 respectively, MAE were revealed to be 0.2174, 0.2400 and 0.2237 respectively, MAPE were revealed to be 2.1298, 2.3489 and 2.1985 respectively. The R Square values indicated that economic growth drivers identified can explained 91.9%, 91.0% and 92.0% variation or changes in the economic growth in Nigeria when LASSO, ridge and elastic net as penalized least square regression techniques were respectively adopted. The lambda penalty for the fitted model using LASSO technique was 0.084 which was higher than that of elastic net technique that stood at 0.000. Also, based on smallest RMSE, MAE and MAPE, it can be emphasized that LASSO as an average centered penalized regression techniques was more sensitive and efficient for estimating and predicting the economic growth when multicollinearity and outliers were jointly present in data set. Hence, the LASSO method showed that INDT, RINR, REXR and OPEN were positively contributed to the RGDP to the turn of 4.27%. 0.40%, 0.49% and 0.53% respectively and the contribution of EXDT to economic growth was negative and as such led to decline in RGDP by 0.98% during the period under consideration. Thus, it can be concluded based on RMSE, MAE and MAPE, normal quantile plot and quantile predicted plot as well as the estimated parameter of RGDP that LASSO was the best and most appropriate model for predicting economic situation in Nigeria. This was evidently showed by the stability of the series and forecasted 10 quarterly RGDP. Therefore, there is a need for urgent action and strong willed to address the retrogressive economic situation. Thus, economic openness should be adopted to enhance the development and the growth of economy.