Quarterly Bulletin Q3 2013

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12 The Domestic Economy Quarterly Bulletin 03 / July 13 Box A: A Monthly Business Cycle Indicator for Ireland By Thomas Conefrey and Joëlle Liebermann 1 Analysts and policy-makers commonly face two problems in trying to assess the current state of the economy in real-time. First, movements in macroeconomic indicators such as retail sales or surveys (e.g. the purchasing managers’ index (PMI)) capture both underlying changes in their business cycle component as well as short-run fluctuations which are mainly idiosyncratic. The latter are noise and/or measurement errors, which are irrelevant in assessing the underlying state of the economy. Indeed, a characteristic feature in the definition of the business cycle is that macroeconomic data broadly move together during phases of downswings and upswings. As such, a business cycle indicator can be seen as the underlying latent factor driving the comovement between numerous macroeconomic variables. An extensive literature has arisen on the construction of business cycle indicators using the factor model framework, which decomposes variables into two components: a common component which is driven by unobserved factors which accounts for most of the co-movement among the variables and an idiosyncratic component which is driven by variable-specific shocks. 2 The second problem is that important macroeconomic variables are available at different frequencies and are published with varying lags. For example, Quarterly National Accounts data on consumption, investment and domestic demand are only released around 80 days after the end of the reference quarter. To have a more timely assessment of the underlying state of the economy, one possibility is to examine monthly variables such as house prices, retail sales and PMIs. We have constructed a monthly business cycle indicator for the Irish economy from a panel of monthly indicators using the factor model framework. The panel includes variables relating to demand and covering the labour, credit and housing markets among others, as well as external variables. Since these variables are released in a non-synchronous manner and with varying publication lags, the panel has a ragged-edge structure at the end of the sample. Hence to provide a real-time signal to policy-makers of the state of the economy, i.e. using the latest available information for each variable, we use the Giannone, Reichlin and Small (GRS) (2008) factor model that can deal with unbalanced datasets. Furthermore, prior to estimation of the business cycle indicator we apply a three-months moving average filter to the (transformed to stationary) series so as to clean them from the very short run fluctuations. Figure A1 shows two versions of the business cycle indicator for the Irish economy: one including only variables reflecting domestic conditions (labeled panel IRL) and a second one reflecting domestic conditions and external demand (labeled panel ALL). The index is normalised to reflect deviations around the long-run path of economic activity. Both versions of the indicator track movements in overall GDP reasonably closely, although the magnitude of some of the changes differs. The indicator captures the sharp decline in economic activity at the height of the financial crisis and the recovery during 2010 and 2011 which was driven by the improvement in the world economy. The indicator including the external variables rises above the version including only domestic variables during 2010 and 2011. This highlights the boost to Irish economic activity from external demand over this period. The indicator including only domestic variables has been broadly flat since early 2011 reflecting the weakness in domestic demand. A small pickup is evident in both indicators during mid-2012, however, there is evidence of weaker activity over recent months. This is consistent with the evidence from other macro data releases discussed elsewhere in the Bulletin. Nonetheless, the indicator remains in positive territory which suggests some underlying strength in economic activity. An Economic Letter detailing the method of construction of this indicator is forthcoming. 1 Irish Economic Analysis Division 2 See among others, Mariano and Murasawa, 2003; Stock and Watson, 1991; Altissimo et al., 2010; Brave and Butters, 2011.
The Domestic Economy Quarterly Bulletin 03 / July 13 13 Box A: A Monthly Business Cycle Indicator for Ireland By Thomas Conefrey and Joëlle Liebermann Box A Fig 1: Business cycle indicator, three month moving average 4.5 2.5 0.5 -1.5 -3.5 -5.5 -7.5 -9.5 Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 ‘13 panel IRL panel ALL Source: CBI, own calculations. External Demand and the Balance of Payments Merchandise Trade Although a pattern of weak merchandise export figures became established during 2012, the latest data indicate that the position deteriorated considerably in the first quarter. It is likely that two factors led to the fall off in goods exports. First, economic growth in the euro area has stalled with GDP estimated to have contracted by 1 per cent in Q1 2013 compared to the same quarter of 2012. Allied to sluggish growth in the UK, this has weakened the demand for Irish exports. Second, patent expiry in the pharmaceutical sector, which accounts for a large share of overall goods exports, has negatively affected recent output figures. The CSO’s Goods Exports and Imports publication provides monthly data on the composition of merchandise trade on a value basis. The data show a sharp decline in the value of exports from the chemicals sector (which accounts for around 50 per cent of overall merchandise exports) commencing at the start of the third quarter of 2012. Between October 2012 and January 2013, the year-on-year fall in exports of chemicals measured almost 10 per cent. As the monthly trade data display considerable volatility, it is useful to look at the figures on an annualised basis. This reveals a drop in the annualised value of total exports from October 2012. The most recent data for the period January to April provide evidence of some recovery in goods exports. The pace of decline in the chemicals sector eased somewhat and exports rose on an annual basis in April for the first time since August 2012. There was also a recovery in other sectors such as food and machinery and equipment. The latest Investec Purchasing Managers index (PMI) data show a return to growth for the Irish manufacturing sector in June. The headline rate in June (50.3) represents the first strengthening in
Page 1: JULY 13 Q3 Central Bank Quarterly B
Page 5 and 6: Contents Section 1 Forecast Summary
Page 7 and 8: Section 1 Quarterly Bulletin 03 / J
Page 9 and 10: 7 Comment Annual National Accounts
Page 11 and 12: 9 The Domestic Economy Overview n A
Page 13: The Domestic Economy Quarterly Bull
Page 17 and 18: The Domestic Economy Quarterly Bull
Page 33 and 34: 31 An Timpeallacht Gheilleagrach Le
Page 35 and 36: 33 Financing Developments in the Ir
Page 37 and 38: Financing Developments in the Irish
Page 55 and 56: 53 Developments in the Internationa
Page 57 and 58: Developments in the International a
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Developments in the International a
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71 EU-IMF Financial Assistance Prog
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EU-IMF Financial Assistance Program
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EU-IMF Financial Assistance Program
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77 Developments in EU Financial Ser
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Developments in EU Financial Servic
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Section 2 Quarterly Bulletin 03 / J
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Analysis of Recent Monetary Operati
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Section 3 Quarterly Bulletin 03 / J
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Statistical Appendix Quarterly Bull
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