Économie et Statistique n° 359-360 - Business Cycle Report
An Indicator of Economic Turnaround in the Euro Zone
The usual economic indicators cannot always detect an economic turnaround in real time. This limit is due to their quantitative nature. To remedy this, we use a probabilistic indicator of economic turnaround. This indicator is designed for the euro zone and draws on answers to five of the questions put by the European business cycle surveys of the manufacturing industry (past and future production trends, total and foreign order book level, and the finished product stock level). A hidden variable, representing the state of the business cycle, is defined from the two-month variations in the balances of opinion concerning these questions. This variable is likely to take three values depending on the current phase of the business cycle (low, medium or high point in the business cycle). We hence estimate the probability, on each date, of the business cycle being in a low, medium or high phase. The findings show, in particular, that the economic signals provided by the balance of opinion are more pertinent than total orders. There is a 94% (respectively 73% and 83%) chance that these order books will be significantly negative (respectively zero and positive) in a low (respectively medium and high) phase of the business cycle. A comparison of the signals that the indicator would have actually generated each month if it had been available since January 1992 with the European economic analyses published by the Forecasting Directorate since this date bears out our findings. The quality, pertinence and early evaluations of the economy that it would have provided would have enabled a faster diagnosis of certain decisive economic downturns.