European Commission Directorate General Economic and Financial Affairs The EU Programme of Business and Consumer surveys: scope and relevance for economic analysis Kristine Vlagsma Reuben Borg International Seminar on Early Warning and Business Cycle Indicators December, 2009

2 European Commission Outline 1.The Joint Harmonised EU Programme of Business and Consumer Surveys –Scope –Methodology –Developments 2. Relevance for Economic Analysis –Information content –Use of survey indicators for economic analysis –Focus on the recent economic crisis

3 European Commission The Joint Harmonised EU Programme of Business and Consumer Surveys

4 European Commission Potential of the EU BCS Strengths –Timely –Representative –Harmonised questionnaire and methodology –No revisions –Historical database –Wide-Coverage: countries, sectors and questions –Reference point to other countries outside the EU BCS programme –Part of Eurostat’s Principal European Economic Indicators (PEEIs) for short-term analysis Shortcomings –Rather inflexible to changes due to harmonisation and logistical issues among many institutes –Interest in soft data decreases as soon as hard data becomes available Comparison with other available surveys –Questions may vary –EU BCS has a larger sample size –EU BCS has a sectoral indicator for all EU countries (currently limited coverage for Ireland)

5 European Commission Scope of the EU BCS Six harmonised surveys are conducted on a monthly basis: –Industrysince 1962 –Construction 1966 –Consumers1972 –Retail Trade1984 –Services1996 –Financial services (pan-EU)2006 In addition: –Investment survey twice a year –Additional quarterly questions in Industry, Consumers, Services, Construction, and Financial services surveys Covers all 27 EU Member States, Croatia, the Former Yugoslav Republic of Macedonia and Turkey (currently limited coverage in Ireland) More than 125,000 firms and over 40,000 consumers surveyed every month across the EU

6 European Commission Data collection and calculations Data are collected in the first half of the month, and then sent to DG ECFIN around a week before the end of the month. The BCS results are usually published on the second last working day of each month DG ECFIN publishes: –Monthly press release and publically available data on the website: ( ) –The Economic Sentiment Indicator (ESI) - EU and euro-area aggregates + seasonally adjusted balance series –6 sectoral Confidence Indicators –Business Climate Indicator (BCI) for the euro area (factor model- based)

7 European Commission Methodology Methodological and practical guidelines published in a EC European Economy - Special Report No 5 –Part A: User Manual –Part B: International guidelines and recommendations on the conduct of BCS –Part C: Studies related to the EU BCS programme –Website of Special Report:

8 European Commission Methodology to compute the euro-area ESI Step 1: calculation of balances per question (Balance = Positive replies – Negative replies) Step 2: calculate euro area (EA) aggregate for individual question. Country weights are taken as shares of each MS in the EA reference series (eg: Industry GVA for industry questions) Step 3: seasonal adjustment of raw data for EA individual question Step 4: standardise EA individual questions, reference period from 1990 till latest December available data Step 5: aggregate EA individual components to get the total weighted average ESI using fixed sectoral weights (Industry 40%, Services 30%, Consumers 20%, Construction 5%, Retail 5%) Step 6: ESI is scaled to have a long-term mean of 100 and a standard deviation of 10 (same reference period for moments)

9 European Commission Administration of the programme (I) Surveys are carried out locally by national institutes according to common principles: –use of the same harmonised questionnaires; –same frequency and timetable; –in compliance with international guidelines on data collection and survey design Commission supports the institutes with grants (maximum 50% of the costs of the surveys) Annual budget of appr. €5-6 million

10 European Commission Administration of the programme (II) Yearly workshops between DG ECFIN and national survey institutes. Every two years, joint conference with the OECD Missions to institutes (to ensure harmonisation and address particular issues) Launch of call for proposal  Current framework agreements with partner institutes cover period May April 2011

11 European Commission Developments Flash Consumer Sentiment –Testing phase –To be released approx 4/5 working days in advance of the final results –Statistical techniques to impute missing values Testing of ‘capacity utilisation’ question in the services survey –Intention to be included in 2011 NACE Revision – changeover in May 2010 –Follows a wide collaboration with partner institutes –Back-casting process in line with NACE 2 classification, going back to – digit level of detail – Totals and Main Industrial Groupings

12 European Commission NACE 2 Revision Practical implications Institutes: –Re-adjustment of activity-related codes –Increased codes (mainly in services) and coverage –Re-adjustment of samples and update of metadata –Need to back-cast historical series in NACE 1 into NACE 2 nomenclature Users: –New historical series, potentially different for a number of codes –Perhaps not that much change for the aggregate figures Back-casting exercise priorities –Smooth and seamless changeover in May 2010: Contingency plans to limit risks –Minimise margin of error in published series especially for country and sector Totals

13 European Commission Relevance for Economic Analysis

14 European Commission Use of sentiment surveys for economic analysis Advantages – timely, good correlation, harmonised, wide-coverage, no revisions, Application and methodologies Forecasting (mainly short-term) –Bridge or indicator models –Dynamic Factor Models Business cycle analysis –Regime-switching Models (Turning-Point Indicator) –Climate Indicators (by sector and by country) –Climate Tracer (cyclical analysis using quadrants) Other ad hoc studies eg: price expectations, investment expectations

15 European Commission The information content of BCS – euro-area ESI Euro-area ESI shows good correlation (0.94) with real GDP growth (year-on-year)

16 European Commission The information content of BCS – Industry The euro area Industrial Confidence Indicator shows good correlation (0.89) with industrial production growth (year-on-year)

17 European Commission The information content of BCS – Services

18 European Commission The information content of BCS – Consumers

19 European Commission The information content of BCS – Construction

20 European Commission The information content of BCS – Retail

21 European Commission The information content of BCS – Investment survey on expectations

22 European Commission The information content of BCS – Capacity utilisation

23 European Commission The information content of BCS – Tracking the Business cycle Economic Climate Tracer – counter-clockwise movement along phases of business cycle 2-step procedure weighted average of five principal-components based sector climate indicators all climate indicators smoothed using the HP filter

24 European Commission Use of sentiment surveys during the economic crisis Provided a good economic anchor for policy analysis months before hard data Timely release (full quarter results at least 2 months ahead of first GDP release of the same quarter) Indicated turning points in the current cycle very well Non-linearities were observed (possible response behaviour changes during the crisis)

25 European Commission Use of sentiment surveys during the economic crisis Indicated start of the downturn phase of the cycle in mid-2007 Signalled the scale of decline in activity in 2008: Q4 Trough in March Subsequent recovery correctly predicted by the ESI so far

26 European Commission Thank you for your attention! For further information about the EU Programme of Business and Consumer Surveys, please consult our website: Contact: DG ECFIN Unit A3 – Economic Studies and Business Cycle Surveys addresses: Kristine Vlagsma: Reuben