By Cyrille Lenoel and Garry Young
When we started the project last year, reviewing real-time turning point indicators, we did not imagine that it would be published at such a significant time. The COVID-19 pandemic has turned into a social and economic crisis and there is greater need than ever for real-time indicators that tell us what state the economy is in. Periods of recession are generally defined several months or years after the event. Real-time turning point indicators have the potential to identify such periods much earlier, thus helping policy makers and others prepare for the next crisis and deal with it when it comes.
Between July and September 2019, we asked a panel of approximately ten leading statistical and economic institutions how they were dealing with economic turning points and what timely indicators they could provide. In this blog, we present some of the results in the context of the current economic situation. You can read our full Discussion Paper here.
First let us explain what we mean exactly by an economic turning point. Economic growth can be decomposed into a trend and fluctuations around that trend. The fluctuations around the trend are called business cycles and turning points are defined as the transition points between phases of a business cycle. Turning points can be the result of endogenous factors (for example a boom and bust credit cycle) or they can be the result of an external shock (for example the current pandemic).
Depending on whether one looks at periods of growth acceleration versus deceleration, expansions versus contraction or maximum deviations from trend, then the turning points can be the points in green, orange or red as in the illustration below.
Our survey identified that qualitative business and consumer surveys are the most popular source of data for turning point indicators because they tend to lead official statistics. For example, surveys asking business managers about their order books and production plans have proved very useful leading indicators. The April PMI Composite Output Index for the UK was at a record-low, suggesting that the UK may experience one of its worst ever contractions in GDP in the second quarter. Other important data sources that have the potential to provide timely indications are financial markets data and trade data. Some novel data sources that have recently been developed are shipping indicators, VAT returns, credit card information and other big data sources. The Office for National Statistics (ONS) has contributed to producing more timely indicators like the Faster indicators and a new bi-weekly ‘Business Impact of Coronavirus Survey’ aimed at explaining economic developments during the pandemic. The Conference Board also uses online job ads for one of its indicators of the labour market. The ONS could expand its set of real-time, or near-real-time, indicators to add more data sources like payments and online job ads to name but some.
Combining official statistics with high frequency data allows us to improve on forecasting models that only use lagged data. This explains why our survey found that composite indicators were by far the most popular turning point indicators. One easy way of combining component series is to create a diffusion index, whereby one looks at whether component indices all move in the same direction or not. In the current situation, showing that all component indices are in the red would show how widespread the current contraction is expected to be.
Other indicators use more advanced econometric methods to define whether we are likely to be in a turning point period. For example, the French statistics office INSEE’s turning point indicator uses a method that assumes that the economy has two regimes: one fast growing and one slow growing (or even contraction). The latest indicator for April shows that the French economy has moved with near certainty away from the fast-growing regime. This does not say how long the downturn will be, but it points to this being a serious economic downturn, not just a bump in the road.
The current pandemic has forced the shutdown of many activities (such as shops, schools, transport, manufacturing, etc.) leading to large losses in revenues and production, beyond the number of people directly infected by the virus. A crucial question to ask is whether economic life will return to normal once the worst of the pandemic is over, or whether there will be lasting consequences in terms of economic activity staying below trend for an extended period. Are we at such a turning point?
This research has been funded by the ONS as part of the research programme of the Economic Statistics Centre of Excellence. An article can be found in the April 2020 edition of the Economic Review, and further detail is available in an ESCoE Discussion Paper.
ESCoE blogs are published to further debate. Any views expressed are solely those of the author(s) and so cannot be taken to represent those of the ESCoE, its partner institutions or the Office for National Statistics.