1 European Commission 2007 European Commission Directorate General for Economic and Financial...

1European Commission 2007

European CommissionDirectorate General for Economic and Financial Affairs

Report: The Economic Climate Tracer –

A tool to visualise the cyclical stance of the economy using survey data

Christian Gayer([email protected])

Joint EC/OECD Workshop on Business and Consumer Surveys12-13 November 2007, Brussels


Conventional use of business and consumer survey results: time series plots

Can information be assembled/presented in a different way, so as to

• create added value for standard users

• reach new audiences by attractive graphics• increase overall service?

Example: Ifo’s "Konjunktur-Uhr“, similar tool was used in DG ECFIN (”Survey Watch”)

Motivation


Economic Climate TracerA new graphical tool used within DG ECFIN • Plotting levels against monthly changes • Rotation through quadrants of the graph• Corresponding to (growth) business cycle

phases • Involves smoothing of input series• Main value added: Cross-section view provides

cyclical stance across sectors at a glance


Outline

1. Critical review of an earlier tool: the “Survey Watch”

2. The Economic Climate Tracer • set-up• time-series view• cross-section view

3. Critical note: smoothness vs. absence of revisions

4. Conclusions


1. Critical review of an earlier tool: the “Survey Watch”

• Similar to Ifo Business Cycle Clock• Manufacturing industry • Current business perceptions vs. expectations

(production, 3 months ahead)• Anticipation: rotation through the 4 quadrants as

expectations should systematically lead assessments


France

-4

-3

-2

-1

0

1

2

3

-6 -4 -2 0 2 4

current perceptions

exp

ect

atio

ns

Upswing Boom

DownswingRecession

Survey Watch, 1990-2006

-4

-3

-2

-1

0

1

2

-3 -2 -1 0 1 2 3

current perceptions

exp

ect

atio

ns

Boom

Recession Downswing

Upswing

-4

-3

-2

-1

0

1

2

-4 -3 -2 -1 0 1 2

current perceptions

exp

ect

act

ion

s

Boom

Recession Downswing

Upswing

Euro area Spain


Drawbacks of the Survey Watch in practice

• Short-term volatility dilutes systematic developments within & between quadrants

• Too short lead of expectations no rotation, but movements along the main diagonal

• Definition of quadrants not in line with conventional business cycle phases, determined by turning points


euro area

-3

-2

-1

0

1

2

-3 -2 -1 0 1 2

current perceptions

expe

ctat

ions

Boom

Recession Downswing

Upswing

Survey Watch, smoothed data

France Spain

-3

-2

-1

0

1

2

-3 -2 -1 0 1 2

current perceptions

expe

ctat

ions

Boom

Recession Downswing

Upswing

-4

-3

-2

-1

0

1

2

-3 -2 -1 0 1 2

current perceptions

expe

ctat

ions

Boom

Recession Downswing

Upswing


Drawbacks of the Survey Watch in practice

• Short-term volatility dilutes systematic developments within & between quadrants

• Too short lead of expectations no rotation, but movements along the main diagonal

• Definition of quadrants not in line with conventional business cycle phases, determined by turning points


2. The Economic Climate Tracer (1)

• Inspired by Statistics Netherlands’ Business Cycle Tracer

• Based on sectoral Climate Indicators, derived by PCA from BCS input series

• Indicators are smoothed (low-pass HP)

• Standardised level on y-axis plotted against m-o-m changes on x-axis


GRAPH 3: Diagram of the Economic Climate Tracer over time

-2

-1

0

1

2

-.4 -.3 -.2 -.1 .0 .1 .2 .3 .4

^

o

increaseddecreased

above average

below average

BoomDownswing

Recession Upswing


2. The Economic Climate Tracer (2)

• Important visual attraction: automatic circular movement (counter-clockwise)

• Smooth evolution due to filtering

• Vertical dimension of the graph mirrors evolution of the raw series

• Peaks in the upper centre of the graph, troughs in the lower centre

• Quadrants correspond to growth cycle phases


Time series view of euro-area climate indicators, Jan 2000 to Sep 2007 (1)

-1.2

-0.8

-0.4

0.0

0.4

0.8

1.2

1.6

-.3 -.2 -.1 .0 .1 .2

month-on-month change

leve

l

00:1

07:09

Boom

Downswing

Recession

Upswing

Industry

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

-.3 -.2 -.1 .0 .1 .2


leve

l

00:1

07:09

BoomDownswing

RecessionUpswing

ECI



-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

-.20 -.15 -.10 -.05 .00 .05 .10


leve

l

00:1

07:09

Boom

Downswing

Recession

Upswing

Consumers

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

-.25 -.20 -.15 -.10 -.05 .00 .05 .10 .15


leve

l

00:1

07:09

Boom

Downswing

Recession

Upswing

Services



-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

-.16 -.12 -.08 -.04 .00 .04 .08 .12 .16


leve

l

00:1

07:09

BoomDownswing

Recession

Upswing

Retaill trade

-0.4

0.0

0.4

0.8

1.2

1.6

-.12 -.08 -.04 .00 .04 .08


leve

l

00:107:09

BoomDownswing

Recession Upswing

Building


Time-series view: summary

• Similar picture across euro-area sectors

• Peak in mid-2000

• Mini-cycles in 2002-2005

• Since 2006 in the boom quadrant

• Move to downswing quadrant in early 2007


Cross-section view

• Displays several indicators in one graph

• Focus on latest data point (smoothed)

• Coincident indicator of overall cyclical stance

• Comparative sector-wise analysis


Cross-section Economic Climate Tracer for the euro area in September 2007

-2

-1

0

1

2

-.4 -.3 -.2 -.1 .0 .1 .2 .3 .4

ECIIndustryServicesConsumersRetail tradeBuilding

above average

below average

increaseddecreased

Euro area

BoomDownswing

Recession Upswing


Cross-section view: euro area

• Peak passed in all business sectors

• Consumer climate marks peak, on the borderline to downswing

• Building, retail trade and particularly industry climate still at high levels

• Services and consumer climate at low levels, never fully recovered from low 2003-05 level


Cross-section Economic Climate Tracer for Germany and France, Sep 2007

-2

-1

0

1

2

-.4 -.3 -.2 -.1 .0 .1 .2 .3 .4

ECIIndustryServicesConsumersRetail tradeBuilding

above average

below average

increaseddecreased

France

-2

-1

0

1

2

-.4 -.3 -.2 -.1 .0 .1 .2 .3 .4

above average

below average

increaseddecreased

Germany


Cross-section view: Germany and France

• Germany in early downswing phase, sustained by still relatively upbeat industry and consumer climate

• France in late boom phase, exceptionally high level of retail climate. All indicators cluster at the border to downswing


3. Critical note: smoothness vs. absence of revisions (1)

• Crucial part of the Tracer: smoothing• Implies revisions as more observations

become available, especially around TPs• Consequence: lag at turning points• Flip side of suppression of erratic turns• Timely and reliable TP-detection in noisy raw

series is difficult, too

matter of choice!



• Focus on easy-to-use graphical tool• Risk of surprises mitigated by look at

unsmoothed series and • Combined look across sectors (clusters?)

Still useful tool in monitoring turning points



Technically: • HP69 filter, i.e. excluding movements of less

than 18 months duration• No de-trending of series • Comparison with other filters: HP works well,

relatively fast in detecting TPs in real time


Conclusions

• Attractive, useful and efficient tool for visualising and analysing the business cycle

• Reliable picture of the current overall state of the economy

• Disaggregate approach enables comparative sector-wise analysis (against historical average and against other sectors)

• Helps to detect turning points• Main value added: Cross-section view provides

cyclical stance across sectors at a glance

1 European Commission 2007 European Commission Directorate General for Economic and Financial...

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