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European economic sentiment indicator: An empirical reappraisal

Petar Sorić (), Ivana Lolić () and Mirjana Čižmešija

No 1505, EFZG Working Papers Series from Faculty of Economics and Business, University of Zagreb

Abstract: In the last five decades the European Economic Sentiment Indicator (ESI) has positioned itself as a high-quality leading indicator of overall economic activity. Relying on data from five distinct business and consumer survey sectors (industry, retail trade, services, construction and the consumer sector), ESI is conceptualized as a weighted average of the chosen 15 response balances. However, the official methodology of calculating ESI is quite flawed because of the arbitrarily chosen balance response weights. This paper proposes two alternative methods for obtaining novel weights aimed at enhancing ESI's forecasting power. Specifically, the weights are determined by minimizing the root mean square error in simple GDP forecasting regression equations; and by maximizing the correlation coefficient between ESI and GDP growth for various lead lengths (up to 12 months). Both employed methods seem to considerably increase ESI's forecasting accuracy in 26 individual European Union countries. The obtained results are quite robust across specifications.

Keywords: Business and Consumer Surveys; Economic Sentiment Indicator; Nonlinear Optimization with Constraints; Leading Indicator (search for similar items in EconPapers)
JEL-codes: C53 C61 E32 E37 (search for similar items in EconPapers)
Pages: 22
Date: 2015-08-18
New Economics Papers: this item is included in nep-eec, nep-for, nep-ger and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:zag:wpaper:1505

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