The drivers of recent developments in business activity expectations across sectors

Niccolò Battistini and Pedro Neves

Economic Bulletin Boxes, 2023, vol. 7

Abstract: This box first analyses a bottom-up composite index of business activity expectations across sectors derived from the European Commission’s business survey. It then assesses the role of demand-side and supply-side drivers of the index, using disaggregated data on expectations and limits to production from the same survey. The bottom-up composite index of business activity expectations appears to be a good leading indicator of real GDP. According to the index, business activity expectations have deteriorated since mid-2022, with the decline occurring earlier than the weakening of economic growth in the euro area. An empirical model is then used to assess the impact of drivers on business activity expectations. The model captures historical business cycle patterns. It shows that recent trends in business activity expectations were driven by deteriorating demand, partly offset by improved supply. A granular model-based decomposition suggests that tightening financial conditions and flagging product demand were the main drag on business activity expectations across sectors in the third quarter of 2023. JEL Classification: C11, E10, E60

Keywords: Business survey; Economic activity expectations; Structural vector autoregression (search for similar items in EconPapers)
Date: 2023-11
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