1 european commission 2007 european commission directorate general for economic and financial...
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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
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2European Commission 2007
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
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3European Commission 2007
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
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4European Commission 2007
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
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5European Commission 2007
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
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6European Commission 2007
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
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7European Commission 2007
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
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8European Commission 2007
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
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9European Commission 2007
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
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10European Commission 2007
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
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11European Commission 2007
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
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12European Commission 2007
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
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13European Commission 2007
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
month-on-month change
leve
l
00:1
07:09
BoomDownswing
RecessionUpswing
ECI
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14European Commission 2007
Time series view of euro-area climate indicators, Jan 2000 to Sep 2007 (2)
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-.20 -.15 -.10 -.05 .00 .05 .10
month-on-month change
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
month-on-month change
leve
l
00:1
07:09
Boom
Downswing
Recession
Upswing
Services
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15European Commission 2007
Time series view of euro-area climate indicators, Jan 2000 to Sep 2007 (3)
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
-.16 -.12 -.08 -.04 .00 .04 .08 .12 .16
month-on-month change
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
month-on-month change
leve
l
00:107:09
BoomDownswing
Recession Upswing
Building
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16European Commission 2007
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
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17European Commission 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
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18European Commission 2007
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
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19European Commission 2007
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
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20European Commission 2007
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
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21European Commission 2007
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
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22European Commission 2007
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!
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23European Commission 2007
3. Critical note: smoothness vs. absence of revisions (2)
• 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
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24European Commission 2007
3. Critical note: smoothness vs. absence of revisions (3)
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
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25European Commission 2007
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