GDP Forecasting with ARIMA, Hidden Markov Models, and an HMM–LSTM Hybrid: Evidence from Five Economies

Abstract

This paper presents a hybrid econometric and machine-learning framework for forecasting GDP that bridges long-run structure with short-run regime dynamics. Using annual World Bank data spanning 1960 to 2024, the framework combines three complementary components: an ARIMA baseline that captures persistence, a three-state Hidden Markov Model (HMM) that provides probabilistic regime identification, and an LSTM-based extension that learns nonlinear patterns associated with regime transitions. Detailed out-of-sample forecasting evidence is reported for five representative countries (the United States, China, Germany, India, and Greece), chosen to illustrate performance across different volatility profiles and economic environments. Across these case studies, the integrated HMM–LSTM approach often delivers lower forecast errors than the benchmark alternatives, although the magnitude of the gains is not uniform across countries. Beyond point forecasting performance, the regime layer yields an interpretable probabilistic representation of business cycle conditions that can support real-time monitoring and early-warning assessment. By combining transparency with adaptability, the proposed framework contributes to the forecasting literature and provides a practical decision-support tool under heightened macroeconomic uncertainty.