Indicators that can provide early signals of turning points in the economic cycle are often more important to markets than the current information on the performance of economies, because markets are most susceptible to such indicators. For the best possible detection of turning points in the Czech economic cycle, we have created a Czech leading indicator, the “Czech Flash”; it comprises four components and, on average, is more than 3 months ahead of the economic cycle. Since 2001, the success of our index in detecting turning points has been 78%. While the Flash is more successful in predicting the peaks, it has also reliably predicted major troughs, such as that after the fall of Lehman Brothers.
- We introduce the Czech leading indicator the “Czech Flash”
- It is 3 months ahead of cycle and has been successful in 78%
In designing our leading indicator, we followed the methodology used by the OECD, which is explained in detail in the Box at the end the document. We used the economic cycle based on the monthly developments in manufacturing. Given its greater frequency, this industry is more appropriate than quarterly GDP statistics. Of the 20 possible pre-identified variables, we finally narrowed our choice to four components of the leading indicator – the German business sentiment index Ifo, future expectations in Czech industry (according to the OECD), new orders in the automotive industry, and the foreign order sub-index of the Czech PMI. Candidates for membership in the index were evaluated by two main criteria: the success in detecting turning points and the stability of the lead. The variables that were most successful in detecting turning points and which predicted the turning points with the greatest stability of the lead were selected.
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