Transcript European Commission DG ECFIN Directorate General Economic and Financial Affairs Constructing a historical Economic Sentiment Indicator Biau Olivier, Borg Reuben, Smyth Christopher Joint EU-OECD WORKSHOP ON BUSINESS AND CONSUMER.

European Commission
DG ECFIN
Directorate General Economic and Financial Affairs
Constructing a historical
Economic Sentiment Indicator
Biau Olivier,
Borg Reuben,
Smyth Christopher
Joint EU-OECD WORKSHOP ON
BUSINESS AND CONSUMER OPINION SURVEYS
Brussels, 12 October 2009
ECFIN– 12/10/2009
Slide 1
Overview
DG ECFIN
Main interest:
EC Economic Sentiment Indicator
- how did it perform in the current recession compared with
previous recessions?
Publically available data for the ESI starts in 1985
Attempt is to replicate same process for construction of
ESI, but going further back pre-1985
Reuben Borg
European Commission, Economic and Financial Affairs
ECFIN – 12/10/2009
Slide 2
Participating institutes
DG ECFIN
IFO (Germany)
INSEE (France)
ISAE (Italy)
CBI (United Kingdom)
CBS (Netherlands)
NBB (Belgium)
SD (Denmark)
Reuben Borg
European Commission, Economic and Financial Affairs
ECFIN – 12/10/2009
Slide 3
A description of the data set available pre-1985
DG ECFIN
Complete raw monthly data for the following:
Jan-60
Jul-62
Jan-65
Jul-67
Jan-70
Jul-72
Jan-75
Jul-77
Jan-80
DE-INDU
DE-BUIL
BE-INDU
BE-BUIL
IT-INDU
IT-BUIL
FR-INDU
NL-INDU (q2,4)
NL-INDU
DK-INDU (q4)
DK-INDU (q4,5)
DK-BUIL
UK-INDU (q5)
UK-INDU
Reuben Borg
European Commission, Economic and Financial Affairs
ECFIN – 12/10/2009
Slide 4
Coverage - country
DG ECFIN
Economic weight of included countries in euro area and EU aggregates:
Industry:
DE, FR, IT, NL, BE (~ 79% of euro area)
DE, FR, IT, NL, BE, DK, UK (~ 74% of EU)
Construction:
DE, IT, BE (~ 42% of euro area)
DE, IT, BE, DK (~ 32% of EU)
% contribution relative to current ESI
(which includes services, consumer and retail)
Industry
Construction
Overall
Reuben Borg
European Commission, Economic and Financial Affairs
euro area
EU
31.4
2.1
33.5
29.6
1.6
31.2
ECFIN – 12/10/2009
Slide 5
Coverage - question
DG ECFIN
Questions:
Industry
2 – order books
4 – stocks
5 – expectations
Construction
3 – order books
4 – employment expectations
Same composition of questions as for the Industrial and Construction
confidence indicators – ensures continuity with present ESI
Methodology – documented in European Economy Special Report:
The Joint Harmonised EU Programme of Business and Consumer Surveys
Reuben Borg
European Commission, Economic and Financial Affairs
ECFIN – 12/10/2009
Slide 6
DG ECFIN
Comparing the Proxy with the Actual euro area ESI –
very close representation
EA - Com parison of ESI w ith historic proxy ESI *
ESI
140
EA Proxy ESI
120
100
80
60
40
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
* industry and building data for BE, DE, FR, IT, & NL
Reuben Borg
European Commission, Economic and Financial Affairs
ECFIN – 12/10/2009
Slide 7
DG ECFIN
Comparing the Proxy with the Actual EU ESI –
very close representation
EU - Com parison of ESI w ith historic proxy ESI *
ESI
140
EU Proxy ESI
120
100
80
60
40
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
* industry and building data for BE, DE, DK, FR, IT, NL & UK(updated)
Reuben Borg
European Commission, Economic and Financial Affairs
ECFIN – 12/10/2009
Slide 8
Constructing the historical ESI - splicing
DG ECFIN
EA - Spliced data series - historic proxy ESI and ESI (from 1985)
140
spliced proxy/ESI
120
100
80
60
40
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
* industry and building data for BE, DE, FR, IT, & NL
Reuben Borg
European Commission, Economic and Financial Affairs
ECFIN – 12/10/2009
Slide 9
Comparison with historical euro area real gdp
DG ECFIN
10
130
8
120
6
110
4
100
2
90
0
80
-2
70
-4
60
-6
50
-8
1970
40
1975
1980
1985
1990
1995
2000
2005
EAGDPYOY (rhs) Source: AWM of ECB
PROXYESI
Reuben Borg
European Commission, Economic and Financial Affairs
ECFIN – 12/10/2009
Slide 10
An analysis of specific questions – stocks the culprit
DG ECFIN
Evolution of Industry Questions
8
order books
stocks (inverted)
prod expectations
standard deviations away from historical mean
6
4
2
0
-2
-4
-6
Reuben Borg
European Commission, Economic and Financial Affairs
ECFIN – 12/10/2009
Slide 11
Jan-08
Jan-06
Jan-04
Jan-02
Jan-00
Jan-98
Jan-96
Jan-94
Jan-92
Jan-90
Jan-88
Jan-86
Jan-84
Jan-82
Jan-80
Jan-78
Jan-76
Jan-74
Jan-72
Jan-70
Jan-68
Jan-66
Jan-64
Jan-62
Jan-60
-8
Conclusions
DG ECFIN
• Proxy-ESI (for the limited sample) gives a good
representation of the actual ESI post-1985
• Difference between proxy and actual is mainly due to the
other sectors (services, consumers and retail)
• This permits us to be reasonably confident in splicing the
historical series in 1985 with the actual ESI (no visible
break-in series)
• Excessive stock levels during the current recession were
still deemed to be less than 1970s crises
• Importance of stocks in the composition of the ESI –
stock cycle moderated during the Great Moderation
period
Reuben Borg
European Commission, Economic and Financial Affairs
ECFIN – 12/10/2009
Slide 12