1. Discussion Contributed Paaers Setcion 3 Scheveningen, 15 December 2009 1 Gian Paolo Oneto ISTAT International Seminar on Early Warning and Business Cycle Indicators Discussion of the Contributed Papers to Session 3: The role of Sentiment Indicators in tracking economic trends

2. Discussion Contributed Paaers Setcion 3 Scheveningen, 15 December 2009 2 The topics to be discussed 1.Just two papers contributed…May be this is a signal that the role of sentiment indicators is still not clearly recognized and duly taken into account in the field of official statistics. This is in contrast with the very relevant role given to the same indicators by users (particularly analysts of short term economic evolution). 2.The first paper (from Insee, France) is a contribution in the field of applied works focusing on the extraction from sets of climate indicators of (advanced) signals of turning points of the business cycle. 3.The second paper (from the National Bureau of Statistics of China) is based on a different approach to “sentiment indicators”. In fact it presents a system of cyclical composite indicators that both aims at tracking the Chinese business Cycle and at gauging signals of the underlying “business climate” (in other words warning signals of imbalances in the macroeconomic status).

3. Discussion Contributed Paaers Setcion 3 Scheveningen, 15 December 2009 3 Paper “The Contribution of Business Survey to the detection of turning points of the economy”, E. Dubois INSEE (1) The paper explores further a well established approach to the measurement of the situation of the economy over the Business Cycle (BC) Calculating the probability that the cycle is in a status of expansion (or of recession) using a Markov-switching model (transition between two hidden or latent status). This approach is utilized officially by INSEE that publish monthly turning point indicators for the French and for the European economy The specific extension presented here is the construction of a set of BC turning point (leading) indicators for some European aggregation (not clearly identified) based on the signals extracted from 5 variables of the (industrial) climate surveys for EMU and other Eu Countries

4. Discussion Contributed Paaers Setcion 3 Scheveningen, 15 December 2009 4 Paper “The Contribution of Business Survey to the detection of turning points of the economy” (2) The results for the Euro Area area (but also for Eu as a whole) are rather disappointing as the BC phases are difficult to disentangle (at least from visual inspection). The results are more interesting using a sub set of 4 EA Countries (BE, DE, FR, SP), and moreover adding 3 non- EMU countries (UK, SWE, DK). The performance at this stage is scrutinized looking only to the regularity and economic “relevance” of the implied BC chronology without specific comparison with a reference indicator (Eu or EMU? economy as a whole or industrial sector?)

5. Discussion Contributed Paaers Setcion 3 Scheveningen, 15 December 2009 5 Paper “The Contribution of Business Survey to the detection of turning points of the economy” (3) The paper discuss in depth the performance of the indicators over the two more recent turning points: Summer 2008, the beginning of the crisis (but may be the Emu was already in a downturn…), and Spring 2009, the likely end of the recession. As for the signals pointing at the downturn, the results are interesting while not particularly good: full fledged signals of the recession appear in June; indeed there is not much to be drawn from this signal in terms of the cliff-diving fall of activity that is going to happen. About the most recent evolution, the probability switch from negative to positive status as early as April 2009, anticipating the expansion that (may be) begun in the third quarter. But here a simple, trivial, question must be answered: what is the reference cycle?:

6. Discussion Contributed Paaers Setcion 3 Scheveningen, 15 December 2009 6 Recalling the graph showed in Ottawa: the IPI cycle compared with Industry business tendency… Industrial production (IPI), Orders and Production Expectations (survey data); in levels (standardised )

7. Discussion Contributed Paaers Setcion 3 Scheveningen, 15 December 2009 7..and updating it with the most recent results Industrial production (IPI), Orders and Production Expectations (survey data); in levels (standardised )

8. Discussion Contributed Paaers Setcion 3 Scheveningen, 15 December 2009 8 Paper “Establishment and empirical analysis of China’s macroeconomic climate index and early-warning index” Pan Jiancheng, National Bureau of Statistics of China (1) The paper summarizes the process undewent to build a system of BC indicators for the Chinese economy in order to make available coincident, leading, and lagging composite indicators. The system is termed “Macroeconomic Climate indexes”: the terminology issue is not to be underestimated… The selection of the three typologies is somewhat non-standard as the focus seems more on the economic rationale for the choice than on their cyclical properties. In this respect the lack of a well established system of short-term statistics is an issue that this approach try to overcome. However at least the target variable or reference concept of BC (growth rate?) should be clarified: the year-on-year rate of growth would be a questionable choice

9. Discussion Contributed Paaers Setcion 3 Scheveningen, 15 December 2009 9 Paper “Establishment and empirical analysis of China’s macroeconomic climate index and early-warning index” (2) The coincident indicator includes: industrial production, employees in the industrial sector; “social demand” proxies (fixed assets investment, retail sales, Imp-Exp); “social income” proxies (tax revenues, profits, disposable income of urban Households). The leading indicator includes: Stock exchange index, sales to output ratio (industrial sector); M2; investment projects (?); two logistics activity variables (in volume); two Real estate sector gauges (in volume). The weighting system for the synthesis is tabulated but not explained: is it related to the variance of the series or the amplitude of the BC phases?

10. Discussion Contributed Paaers Setcion 3 Scheveningen, 15 December 2009 10 Paper “Establishment and empirical analysis of China’s macroeconomic climate index and early-warning index” (3) What are the results? The graph comparing the coincident and the leading indicators deserves some comment. The amplitude of the BC phases is very different between the first and the second part of the period; without specific knowledge of China economic evolution (i.e. in pure BC feature terms) the very long phase of almost steady growth rate (but is it measuring the rate of change of the economy?) of the 00’s is puzzling; may be there is just a faint acceleration in the pace of growth before the 2008 crisis (and the crisis by the way is rather mild). The leading properties of the CLI do not seem very stable over time: the time span of the lead is very long up to 2000 (circa), and very short in the recent up- and downswings.

11. Discussion Contributed Paaers Setcion 3 Scheveningen, 15 December 2009 11 Paper “Establishment and empirical analysis of China’s macroeconomic climate index and early-warning index” (3) The second “level” of the system of cyclical indicators is termed “Business Cycle Signal system and Macro- economic Monitoring indicators”; it differs from our standard tools for interpreting BC developments. The approach boils down to develop a process to score the different status of the cyclical development of each variables (over-heating, heating, normal, likely cool, cool) according to their specific values over the sample. The scores are aggregated in a new composite indicator: its values are categorized in 5 brackets translating in a kind of “early warning” reading. In standard macroeconomic terms is may be a very empiric approach to an “output gap” concept. The recent readings are puzzling: in 2008 and 2009 the Chinese economy has fluctuated almost always in the “normal” status zone.

12. Discussion Contributed Paaers Setcion 3 Scheveningen, 15 December 2009 12 Some general remarks to conclude… When talking about cyclical signals the reference variable of the analysis mast be clearly stated, or in terms of reference cycle (the NBER BC approach), or in terms of target variable. The same issue can be seen from another point of view: while there is a general understanding of what is a leading indicator (of GDP level or change, of IPI, of the turning points of the classical BC or of the growth cycle) we need to sharpen the definition of coincident indicator. Finally, about the role of sentiment indicators: still a lot of work to do in bringing them in the standard tool-kit of official statistics; to proceed, we need to enhance the cooperation between statistical agencies and producers of sentiment indicators.