Are the "Economic Sentiment Indicators" of the EU Commission still valuable indicators of EU business cycles? Can they be improved?
The Commission publishes on a monthly basis the results of the harmonised business and consumer surveys of the member countries. Since the mid-1980s, the Commission releases the essence of all the information they calculate in the form of the so-called "Economic Sentiment Indicators", for the member countries as well as the whole community and the euro zone. These indicators are meant to provide early information on the cyclical evolution of quarterly GDP and/or monthly production. Presently they are based on arithmetic means of several variables from the surveys of manufacturing industry, building construction and the consumers. These "Confidence Indicators" are supplemented region-wise by share price indices. Ifo's analysis first of all showed that for most of the European countries as well as the two aggregates the Economic Sentiment Indicators were lagging somewhat the growth rates on previous year of the respective production indices.
After having analysed the data for EU-15, the euro-zone, the United Kingdom and Germany, Ifo suggested the following changes, which should lead to a better timing of the indicators and also a closer correlation with the growth rates of production:
The resulting series for the euro-zone achieved a better fit to the growth rates of production (from R=0.74 to 0.92) and a better timing (from 3 months average lag to 1 month average lead). On the other hand, the results showed a little more irregular disturbances. To reach relatively smooth curves, a de-noising method used mainly in physics - the Wavelet Analysis - was tried with promising results. Unlike the usual smoothing methods employing moving averages, there seems to be no loss of information at the recent end of the series.
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