Shortterm economic indicators for business cycle analysis and forecasts

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German Federal Ministry of Economics German
Federal Ministry of Finance

• Short-term economic indicators for business cycle
  analysis and forecasts
• as a basis for Economic and Fiscal
• Policy Making
• Presentation for the
• OECD STESWP meeting, 23 - 24 June 2008
• Dr. Hartmut Hüsges, Federal Ministry of Finance
• Dr. Christhart Bork, Federal Ministry of
  Economics and Technology

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German Federal Ministry of Economics German
Federal Ministry of Finance

• Economic Analysis and Forecasts in the
  Government
• Role and Purposes
• Data Requirements
• Crucial Developments

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German Federal Ministry of Economics German
Federal Ministry of Finance

• Purposes of observation,analysis and forecasting
• Information about economic and fiscal
  developments
• Support of macroeconomic and fiscal policy making
• Set-up of federal and social security budgets

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German Federal Ministry of Economics German
Federal Ministry of Finance

• Purposes of observation, analysis and forecasting
  (cont.)
• Internal information
• Information of the Ministers about economic and
  fiscal development
• i.e. about
• developments and perspectives in the economy
• show options/consequences for policy formulation

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German Federal Ministry of Economics German
Federal Ministry of Finance

• Purposes of observation,analysis and forecasting
  (cont.)
• Internal information (cont.)
• Set-up of the budget
• Estimation of revenues
• Estimation of expenditures

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German Federal Ministry of Economics German
Federal Ministry of Finance

• Purposes of observation,
• analysis and forecasting (cont.)
• Internal information (cont.)
• Identification of economic policy areas of action
  
• Diagnosis is a precondition for policy
  formulation
• Formulation of policy targets
• Preparation of measures / instruments
• Simulation of policy impacts
• Policy control / support of policy making

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German Federal Ministry of Economics German
Federal Ministry of Finance

• Purposes of observation,analysis and forecasting
  (cont.)
• External information
• Informing the public about economic development,
  interpretation
• Informing the public about the economic and
  fiscal policy
• Reporting to international institutions (EU,
  OECD, IMF)

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German Federal Ministry of Economics German
Federal Ministry of Finance
Responsibilities for analysis and forecasting

• Federal Ministry of Economics and Technology is
  responsible for short and medium term
  projections.
• Other Ministries involved are mainly Federal
  Ministry of Finance, Federal Ministry of Health,
  Federal Ministry of Labour and Social Affairs,
  Office of the Chancellor.

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German Federal Ministry of Economics German
Federal Ministry of Finance

• Periodicity of Forecasts
• Very short term forecasts or now-casting
• Flash-estimate for each quarter
• Short term projections
• January annual economic report
• April spring projection
• October autumn projection
• Medium and long term projections

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German Federal Ministry of Economics German
Federal Ministry of Finance

• Data requirements
• System of National Accounts as a consistent
  analytical framework
• Business cycle indicators
• Other relevant data like exchange rates, interest
  rates, world market development, etc.

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German Federal Ministry of Economics German
Federal Ministry of Finance

• Business cycle indicators used
• business climate, situation and expectations by
  sectors
• orders and production in industry
• orders and production in construction
• retail and wholesale trade
• export expectations
• foreign order, exports, imports, terms-of trade
• prices (e.g. raw materials, import/export prices,
  producer prices, consumer price index)
• labour market (e.g. employment, unemployment,
  demand and supply of labour)
• quarterly gross domestic product (GDP) and its
  components

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German Federal Ministry of Economics German
Federal Ministry of Finance

• Main principle of forecasting
• Use the same approaches, methods, and indicators
  applied by the Federal Statistical Office for
  updating national accounts data(based on
  indicators until primary statistical data are
  available)

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German Federal Ministry of Economics German
Federal Ministry of Finance

• Examples
• Estimation of value added in
• manufacturing industry
• retail sales

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German Federal Ministry of Economics German
Federal Ministry of Finance
15
German Federal Ministry of Economics German
Federal Ministry of Finance
16
German Federal Ministry of Economics German
Federal Ministry of Finance

• Limitations
• GDP data subject to substantial revisions
• Private Consumption (retail sales subject to
  enormous revisions)
• Exports, Imports (foreign trade statistics
  problems of time consistency)
• Inventories (no data available, calculated as a
  residual)
• Investments in machinery and equipment (no data
  from primary statistics available estimated by a
  commodity flow approach)
• Services sector (lack of information, use of
  auxiliary data, e.g. employment figures)

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German Federal Ministry of Economics German
Federal Ministry of Finance

• Examples
• Revisions of
• retail sales index
• employment data

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German Federal Ministry of Economics German
Federal Ministry of Finance
19
German Federal Ministry of Economics German
Federal Ministry of Finance
20
German Federal Ministry of Economics German
Federal Ministry of Finance

• Crucial developments
• At the expense of quality and accuracy
• measures to reduce bureaucracy burden
  (reduction of sample size, raising threshold
  values for recording, administrative data replace
  primary statistics)
• more timeliness (quarterly GDP discussion about
  t45 vs. t30)
• more completeness in national accounts despite
  lack of statistical data (FISIM, immaterial
  investments, informal sector, discussion about
  recording human capital)

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German Federal Ministry of Economics German
Federal Ministry of Finance

• Our preference as forecasters
• High quality data with less revisions
• rather than
• more timely and
• more complete GDP data without statistical basis

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Thank you for your attention!
German Federal Ministry of Economics German
Federal Ministry of Finance