Singapore

1
Tracking and Anticipating Singapores Growth
Cycles
International Seminar on Early Warning and
Business Cycle Indicators 15 December 2009
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Outline

• Singapores Composite Leading Index (CLI)
• CLI Components and Compilation
• Performance of CLI
• Does CLI Provide Early Warning?

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Singapores Composite Leading Index (CLI)
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Singapores Composite Leading Index

• Established in the aftermath of the 1985
  recession with the help of the Centre for
  International Business Cycle Research at Columbia
  University
• Reviewed and revised in 2004 to ensure its
  continuing relevance and enhance its ability to
  anticipate growth cycle fluctuations

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Classical Cycles and Growth Cycles

• Classical Cycles
• Expansions and contractions in the levels of
  aggregate economic activity
• Growth Cycles
• Deviations from the long-term trend growth rate
  of the economy deviation cycles
• More relevant for economies exhibiting long
  upward trend like Singapore

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CLI Components and Compilation
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Selection Criteria for CLI Components

• Economic Significance
• Express early sentiment and expectations of
  economic agents
• Measure activity during early stages of
  production
• Cyclical Behaviour
• Cycles consistently lead cycles of reference
  series
• No missing or extra cycles
• Leads at turning points are relatively
  homogeneous
• Timeliness and Periodicity
• Monthly series preferred to quarterly series

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Components of the CLI

• Total New Companies Formed
• Business Expectations of Wholesale Trade, Qtrly
• Business Expectations of Stock of Finished Goods
  (Mfg), Qtrly
• Money Supply (M2)
• Stock Exchange of Singapore Indices
• US Purchasing Managers Index
• Domestic Liquidity Index
• Non-Oil Retained Imports
• Total Non-Oil Seaborne Cargo Handled

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CLI Compilation Method

• Adopted The Conference Boards (TCB) approach
• Compute month-on-month changes for each component
• Adjust month-on-month changes to equalise
  volatility of each component
• Sum the components adjusted month-to-month
  changes for each month to obtain the growth rate
  of CLI
• Level of the index is computed using the
  symmetric percent change formula
• With some differences
• Quarterly components (i.e. Business Expectations)
  are interpolated into monthly data using cubic
  spline
• CLI growth rates are not adjusted to equate their
  trends to the Composite Coincident Index

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Methodology to IdentifyCLI Turning Points

• Step 1 Obtain six-month smoothed annualised rate
  (SMMAR)
• Step 2 Identify Turning Points
• Bry-Boschan (1971) algorithm is used to estimate
  the peak and trough of CLI SMMAR

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Performance of the CLI
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CLI Reference Series CCI

• Singapores Composite Coincident Index (CCI),
  which encompasses a broad spectrum of economic
  activities, is used as the basis for identifying
  Singapores growth cycles
• Singapores CCI was developed in 1986 and
  reviewed in 2004. As with CLI, it was developed
  and updated using TCBs approach

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Methodology to Identify CCI Growth Cycles

• Step 1 Trend Estimation
• Phase-Average Trend (PAT) method developed by
  NBER to separate long-term trend from
  shorter-term cycles so that underlying cyclical
  fluctuations are more prominent
• Previously used by OECD. OECD switched to
  Hodrick-Prescott (HP) Filter in late-2008. We are
  presently assessing the possibility of using HP
  Filter.
• Step 2 Identify Turning Points
• Bry-Boschan (1971) algorithm to estimate the
  peak and trough dates in detrended series

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Historical Performance of CLI in Predicting
Growth Cycles

• CLI SMMAR leads historical growth cycles

-15
0
-2
-2
-3
-7
Jul 97-Nov 98 Asian Financial Crisis Downturn in
global electronics cycle
Aug 00-Oct 01 Global economic downturn Severe
downturn in global electronics cycle
Apr 02-Apr 03 Broad-based weakness in domestic
economy
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Historical Performance of CLI in Predicting
Classical Cycles

• Classical Cycles can be identified by applying
  Bry-Boschan (1971) algorithm to identify the
  turning points in CCI
• CLI leads historical classical cycles

-12
0
-4
-2
-3
-6
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Does CLI Provide Early Warning?
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Does CLI Provide Early Warning?

• Singapore experienced 4 consecutive quarters of
  negative quarter-on-quarter growth from 2Q08 to
  1Q09
• How did CLI perform as a early warning system
  during that period?

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Does CLI Provide Early Warning?
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Does CLI Provide Early Warning?
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Does CLI Provide Early Warning?

• Yes, the CLI does provide early warning, turning
  down before the onset of a recession and up
  before recovery.
• However, most analysts and commentators at the
  time were sceptical that the economy was about to
  turn projecting a continuation of the then
  prevailing trend.
• Compilers may need to do more to report on and
  draw attention to the CLIs
• Users will need to have the discipline to pay
  attention to the CLIs, particularly when they are
  or seem to be signalling the possible onset of
  turning points

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References
Bry, G., and C. Boschan, 1971. Cyclical Analysis
of Time Series Selected Procedures and Computer
Programs. New York NBER. OECD, 2008. Upcoming
changes to the OECD Composite Leading Indicators
to be implemented in the December 2008 MEI.
Available at http//www.oecd.org/dataoecd/46/61
/41635628.pdf Accessed 4 November 2009