1 European Commission 2007 European Commission Directorate 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 Joint EC/OECD Workshop on Business and Consumer Surveys November 2007, Brussels

2 European 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

3 European Commission 2007 Economic Climate Tracer A 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

4 European 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

5 European Commission 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

6 European Commission 2007 France Survey Watch, Euro areaSpain

7 European 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

8 European Commission 2007 euro area Survey Watch, smoothed data France Spain

9 European 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

10 European Commission 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

11 European Commission 2007 GRAPH 3: Diagram of the Economic Climate Tracer over time

12 European Commission 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

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

14 European Commission 2007 Time series view of euro-area climate indicators, Jan 2000 to Sep 2007 (2)

15 European Commission 2007 Time series view of euro-area climate indicators, Jan 2000 to Sep 2007 (3)

16 European Commission 2007 Time-series view: summary Similar picture across euro-area sectors Peak in mid-2000 Mini-cycles in Since 2006 in the boom quadrant Move to downswing quadrant in early 2007

17 European 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

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

19 European 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 level

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

21 European 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

22 European Commission 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!

23 European Commission 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

24 European Commission 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

25 European 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