Tracking and Anticipating Singapore’s Growth Cycles International Seminar on Early Warning and Business Cycle Indicators 15 December 2009

Outline Singapore’s Composite Leading Index (CLI) CLI Components and Compilation Performance of CLI Does CLI Provide Early Warning?

Singapore’s Composite Leading Index (CLI)

Singapore’s Composite Leading Index Established in the aftermath of the 1985 recession with the help of the Centre for International Business Cycle Research at Columbia University Reviewed and revised in 2004 to ensure its continuing relevance and enhance its ability to anticipate growth cycle fluctuations

Classical Cycles and Growth Cycles Expansions and contractions in the levels of aggregate economic activity Growth Cycles Deviations from the long-term trend growth rate of the economy – “deviation cycles” More relevant for economies exhibiting long upward trend like Singapore

CLI Components and Compilation

Selection Criteria for CLI Components Economic Significance Express early sentiment and expectations of economic agents Measure activity during early stages of production Cyclical Behaviour Cycles consistently lead cycles of reference series No missing or extra cycles Leads at turning points are relatively homogeneous Timeliness and Periodicity Monthly series preferred to quarterly series

Components of the CLI Total New Companies Formed Business Expectations of Wholesale Trade, Qtrly Business Expectations of Stock of Finished Goods (Mfg), Qtrly Money Supply (M2) Stock Exchange of Singapore Indices US Purchasing Managers’ Index Domestic Liquidity Index Non-Oil Retained Imports Total Non-Oil Seaborne Cargo Handled

CLI Compilation Method Adopted The Conference Board’s (TCB) approach Compute month-on-month changes for each component Adjust month-on-month changes to equalise volatility of each component Sum the components’ adjusted month-to-month changes for each month to obtain the growth rate of CLI Level of the index is computed using the symmetric percent change formula With some differences Quarterly components (i.e. Business Expectations) are interpolated into monthly data using cubic spline CLI growth rates are not adjusted to equate their trends to the Composite Coincident Index

Methodology to Identify CLI Turning Points Step 1: Obtain six-month smoothed annualised rate (SMMAR) Step 2: Identify Turning Points Bry-Boschan (1971) algorithm is used to estimate the peak and trough of CLI SMMAR

Performance of the CLI

CLI Reference Series: CCI Singapore’s Composite Coincident Index (CCI), which encompasses a broad spectrum of economic activities, is used as the basis for identifying Singapore’s growth cycles Singapore’s CCI was developed in 1986 and reviewed in 2004. As with CLI, it was developed and updated using TCB’s approach

Methodology to Identify CCI Growth Cycles Step 1: Trend Estimation Phase-Average Trend (PAT) method developed by NBER to separate long-term trend from shorter-term cycles so that underlying cyclical fluctuations are more prominent Previously used by OECD. OECD switched to Hodrick-Prescott (HP) Filter in late-2008. We are presently assessing the possibility of using HP Filter. Step 2: Identify Turning Points Bry-Boschan (1971) algorithm to estimate the peak and trough dates in “detrended series”

Historical Performance of CLI in Predicting Growth Cycles CLI SMMAR leads historical growth cycles -15 -2 -2 -3 -7 Jul 97-Nov 98 Asian Financial Crisis Downturn in global electronics cycle Aug 00-Oct 01 Global economic downturn Severe downturn in global electronics cycle Apr 02-Apr 03 Broad-based weakness in domestic economy

Historical Performance of CLI in Predicting Classical Cycles Classical Cycles can be identified by applying Bry-Boschan (1971) algorithm to identify the turning points in CCI CLI leads historical classical cycles -12 -4 -2 -3 -6

Does CLI Provide Early Warning?

Does CLI Provide Early Warning? Singapore experienced 4 consecutive quarters of negative quarter-on-quarter growth from 2Q08 to 1Q09 How did CLI perform as a early warning system during that period?

Does CLI Provide Early Warning? Jun 07 peak in CLI SMMAR Sep 08 collapse of Lehman Brothers Oct 07 peak in CLI Dec 08 troughs in CLI SMMAR and CLI

Does CLI Provide Early Warning? Forecast 5.6% Oct 07 peak in CLI 4Q07 growth 6.0% Forecast 2.2% Sep 08 collapse of Lehman Brothers 3Q08 growth -0.5% 2Q08 growth 1.9% Forecast 4.2% Forecast 5.5% 1Q08 growth 7.2%

Does CLI Provide Early Warning? Yes, the CLI does provide early warning, turning down before the onset of a recession and up before recovery. However, most analysts and commentators at the time were sceptical that the economy was about to turn projecting a continuation of the then prevailing trend. Compilers may need to do more to report on and draw attention to the CLIs Users will need to have the discipline to pay attention to the CLIs, particularly when they are or seem to be signalling the possible onset of turning points

References Bry, G., and C. Boschan, 1971. Cyclical Analysis of Time Series: Selected Procedures and Computer Programs. New York: NBER. OECD, 2008. Upcoming changes to the OECD Composite Leading Indicators to be implemented in the December 2008 MEI. Available at: http://www.oecd.org/dataoecd/46/61/41635628.pdf [Accessed 4 November 2009]