Economic sentiment indicators and their prediction capabilities in business cycles of EU countries

Abstract

Research background: The post-World Financial Crisis period has showed us that an application of the qualitative data focused on the expectations of the enterprises and consumers in a combination with the quantitative data in the individual economy sectors is a good prerequisite for reliable prediction of the economic cycles. Purpose of the paper: The main goal of the presented study was to test the ESI prediction capabilities and its components in a relation to the economic cycles of the EU countries in the individual time periods. Methods: The time series for the period Q1 2000 to Q4 2022 and the three selected time periods were a subject to undergo the selection of the cyclical component applying the Hodrick-Prescott filter and then, the relationship between the variables was determined employing the Pearson correlation coefficient with the time shifts. The relation of ESI and its components to GDP and the Index of Industrial Production (IIP), which represent the economic cycle, was analysed. The prediction volume and the cross-correlation values determined the nature of the observed cyclical variables. Findings & value added: The results of the analysis point to the fact that ESI and its components are able to ensure a high-quality prediction of the economic cycle only in the selected EU countries. Regarding the components of the ESI, the Consumer confidence indicator, Construction and Industrial confidence indicators show the best predictive capabilities. The analytical outcomes show that the ESI size and lead period vary over time and after the 2008 crisis, the ESI showed better predictive capabilities in a relation to GDP and IIP than before the crisis. The Covid 19 pandemic had a significant negative impact on the ESI predictive capabilities.