2003 EDITION Nowcasting Eurozone Industrial Production THEME 1 General EUROPEAN statistics COMMISSION 1 Europe Direct is a service to help you find answers to your questions about the European Union New freephone number: 00 800 6 7 8 9 10 11 A great deal of additional information on the European Union is available on the Internet. It can be accessed through the Europa server (http://europa.eu.int). Luxembourg: Office for Official Publications of the European Communities, 2003 ISBN 92-894-3416-3 ISSN 1725-4825 © European Communities, 2003 Nowcasting Eurozone Industrial Production Dominique Ladiray and Dermot O’Brien Abstract The aim of this paper is to develop a methodology for the estima- tion of nowcasts of the Eurozone Industrial Production Index (IPI) for a delay of less than 45 days. We propose to build well-specified robust models for annual and monthly eurozone IPI growth rates that incor- porate information from business surveys and partial information from Member States. We prioritise models that are stable and well-specified and the optimal models are determined on the basis of an assessment of nowcasting performance for real-time data. 1 TABLE OF CONTENTS 1. Introduction................................................................................................ 3 2. Evolution of Arrival Delays ....................................................................... 3 3. Prospects for an Early IPI .......................................................................... 5 4. Developing a Methodology for Producing IPI Nowcasts .......................... 6 5. Models for Eurozone IPI............................................................................ 7 5.1 Annual IPI Growth Rates .................................................................... 7 5.1.1 Model A: NAIVE Model ........................................................... 7 5.1.2 Model B: GETS with Business Surveys.................................... 8 5.1.3 Model C: GETS with Business Surveys and Partial Information (1) ............................................................... 9 5.1.4 Model D: GETS with Business Surveys and Partial Information (2) ............................................................... 9 5.1.5 Model E: Simple Statistical Estimate ........................................ 10 5.1.6 Previous Eurostat Study............................................................. 10 5.2 Monthly IPI Growth Rates .................................................................. 10 5.3 VAR Modelling of Eurozone IPI Monthly Growth Rates................... 11 6. Nowcasting Performances.......................................................................... 12 7. Conclusion ................................................................................................. 15 References....................................................................................................... 16 2 1 Introduction There has been a clear convergence towards more timely provision of the Industrial Production Index (IPI) by Member States following legislation introduced in 1998. This legislation requires a delay of no longer than 45 days and we find that, in the year 2001, the larger Member States typically respected this deadline. Any attempt to produce reliable nowcasts for the IPI appreciably earlier than the 45 day deadline would need to incorpo- rate supplementary information by way of business surveys and/or partial information from Member States. Section 2 presents an analysis of the delay times of the Member States’ IPI. We consider, in Section 3, the prospects for the production of IPI now- casts for delays shorter that a 45 day delay. In Section 4, we discuss some of the issues involved in developing a methodology for producing nowcasts. Subsequently, we propose some tentative models for annual and monthly IPI growth rates in Section 5 and provide an assessment of the nowcasting performance of the competing models in Section 6. Section 7 concludes. 2 Evolution of Arrival Delays We have data on reference and arrival dates over the period June 1999 to October 2001 and the delays (delay=arrival-reference) in days have been calculated. Figure 1 illustrates the development over time of delays for the respective Member States’ IPI. The plot brings into sharper focus the coun- tries for which there have been substantial improvements in delay times and we can observe that Austria, Finland, Portugal and Spain in particular have made strong gains. Some of the larger EU Member States, such as Germany and the UK, have been satisfying the 45 day deadline on a consistent basis. Despite these advances, some Member States such as Austria, Greece, and Ireland continue to provide IPI data with a relatively big delay. The European aggregate IPI is only calculated when Eurostat has re- ceived at least 60% of the total weighting. Table 1 indicates that for the most recent reference period (Oct 2001) there was a delay of 42 days be- fore over 60% of the total weight was received. In practise the aggregate IPI is calculated when over 90% of the total weight has been received and this occurs approximately at the delay legislated for i.e. 45 days (with the exception of July). 3 Figure 1: Evolution of delays. Table 1: Delays for Cumulative Weightings Reference 30% 40% 50% 60% 70% 80% Oct ’00 37 37 41 45 45 49 Nov ’00 43 47 47 47 48 50 Dec ’00 39 39 39 44 46 47 Jan ’01 37 40 40 43 43 44 Feb ’01 40 40 40 43 44 44 Mar ’01 40 40 44 44 45 45 Apr ’01 39 42 42 44 45 45 May ’01 39 39 40 42 43 46 Jun ’01 38 39 39 40 41 45 Jul ’01 38 42 42 44 51 66 Aug ’01 39 40 40 45 45 45 Sep ’01 39 39 44 44 45 46 Oct ’01 37 40 41 42 43 44 The cumulative weights (in percentages) for a given delay are presented in Table 2. We can observe that, for a given reference period, at most two of the smaller states (two of Finland, Luxembourg and Denmark) have provided IPI data with a delay of 35 days or less during 2001. The fact that Finland has already broken the 30 day delay barrier does offer some hope that a 30 day delay for the Eurozone IPI is a realisable goal with other Member States following the example set by Finland. 4 With the possible exception of Germany, we can observe a high volatility for the delays and in particular a sharp jump in delays for July. Volatile delays, needless to say, complicate the task of producing an IPI nowcast with a known and systematic release date. Table 2: Cumulative Weights for a given Delay, year 2001 Delay Jan Feb Mar Apr May Jun Jul Aug Sep Oct 45 85.7 92.7 92.7 92.6 78.0 92.7 61.3 89.5 76.0 93.9 44 85.7 92.7 60.1 62.8 78.0 77.5 61.3 59.7 60.9 93.9 43 70.6 62.9 44.5 59.6 78.0 77.5 58.1 59.7 45.3 79.2 42 53.0 58.0 44.5 58.4 62.9 77.5 51.9 59.7 45.3 60.9 41 53.0 56.8 44.5 31.2 59.1 77.5 31.3 59.7 45.3 59.7 40 53.0 53.0 41.3 31.2 55.9 68.5 31.3 55.9 45.3 49.7 39 37.4 17.2 1.7 31.2 48.5 50.0 31.3 34.1 44.1 34.1 38 37.4 17.2 1.7 1.6 3.3 31.2 31.3 3.2 3.3 34.1 37 37.4 17.2 1.7 1.6 3.3 0 1.6 3.2 1.6 34.1 36 1.6 0 0 1.6 3.3 0 1.6 3.2 1.6 1.7 35 1.6 0 0 1.6 1.7 0 1.6 3.2 1.6 1.7 3 Prospects for an Early IPI Legislation dating from 1998 established a clear target for submission of IPI to Eurostat and has been successful in encouraging Member States to shorten delays. We can observe that the major economies in the eurozone provide IPI data with a delay that respects the 45 day deadline (or almost, as in the case of Italy). The recent Finnish performance in providing IPI data can serve as a useful point of reference to other Member States. However, unless new legislation is introduced, Member States may not be motivated to the same extent to make further reductions in delay times. Moreover, it may become progressively more difficult to reduce delays as in the beginning the more obvious steps in reducing delay times are taken. The task of developing a methodology for producing early indicators for the IPI is a challenging one. However, information from business surveys and flash estimates from larger Member States can provide valuable explanatory power. We propose to incorporate this information into a model of IPI and demonstrate that reliable early indicators for the IPI can be obtained with a well-specified model. 5 4 Developing a Methodology for Producing IPI Nowcasts There are a number of criteria that need to be satisfied when developing a model for producing early indicators (nowcasts) of the IPI. These criteria fall under three headings ² Statistical: The model needs to be well-specified with model robust- ness being a particularly desirable property. We note also that real- time data (i.e. non-revised) may be subject to three forms of revisions: Member States provide revisions of previously submitted data; Mem- ber States provide data that was previously estimated by Eurostat; and seasonal adjustment revisions. The delay time for the IPI now- cast should be sufficiently reduced from 45 days to make the nowcasts of clear benefit to users. In this case, we would need to incorporate into our model information from other sources e.g. business surveys and flash estimates from Member States. ² Economic: The model needs to have a sensible economic interpreta- tion. ² Production: The model must be simple and easy to implement. An important property of the model is that it should be stable over time so as to avoid a necessity for frequent revisions of the model. A further issue concerns whether to nowcast the Eurozone IPI (direct approach) or nowcast Member States’ IPI and then aggregate (indirect ap- proach).