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Business tendencies monitoring in the real economy and services

Priority areas of development: economics
2013
The project has been carried out as part of the HSE Program of Fundamental Studies.

Implementation of national programs aimed at creating in the country a business climate most favorable for the further expansion of business activity greatly increases the importance of research related to updating the information infrastructure.

The need to adequately reflect socioeconomic realities, the possibility of rapid and flexible adaptation to changing economic conditions and recurring economic shocks are the main factors that can reinforce the significance of an information resource, especially in an economic reform context.

In circumstances where the main dominant factor affecting the growth of key macro-aggregates is the noticeable loss of its potential values, mood swings among economic agents and changes in their basic behavioral patterns highlight the deficiencies of traditional statistical observation of the short-term sectoral trends. This situation explains the relevance of research aimed at the development of information resources with a broad range of indicators combining entrepreneurial assessment of prevailing and anticipated events on the sectoral and territorial levels that must show in real time the most significant socioeconomic implications, effects, barriers, bottlenecks, etc. of structural changes happening in the country.

Non-quantitative observations to assess the extent of sectoral activities and short-term changes, as well as using different kinds of unstructured information sources allows the gathering of data on the dynamics of entrepreneurial optimism regarding such things as business and investment climate, business trends, activity, business confidence and economic sentiment. Using this information helps not only to fill gaps in quantitative statistics, but also makes its content comprehensible to users, efficient, available, up-to-date; at the same time, statistical reliability helps to extend the regulatory and forecasting competence of decision-makers at all levels of authority and to meet the information needs of the business expert community and of the business community.

In addition, the need to prevent possible distortions of information, especially when recessionary sectoral processes develop, determines the timeliness of activities aimed at increasing short-term observation areas, the coverage of those structural and situational aspects in the business environment that allow to evaluate the data of business surveys in the field of financial services.

Given the specific features of the service sector as a whole, which include a large number of organizations involved in various activities differing substantially in size, sources of finance, technology and performance, organization of survey of the business climate on the financial services market was largely predetermined by the growing importance for the national economy of financial intermediation in the global economic system, as well as increased sensitivity of national economies to the cyclical dynamics of the sector, clearly expressed in the short time intervals.

However, in an emerging market, when the major issue is the regulation of the economy depending not only on internal factors but also external ones caused by the accumulation of significant risks at any fluctuations in the dynamics of long-term growth in countries with developed market economies, it is becoming increasingly important to design a set of relevant comparisons with international counterparts, in particular, the dynamics of short-term indicators of business trends in the European Union and OECD members as well as BRICS members.

The presented directions of updating the information and analytical content of business tendencies monitoring justify the appropriateness of the goals and objectives that allow the successfully implemention of this method of non-quantitative observation.

The main goal is to provide methodological support for a harmonized system of sectoral business climate monitoring and its introduction into the practice of public statistical observation to expand objective information describing in real time current and expected business trends in the cyclical development of sectoral and aggregate economic activity.

The main objects of study are the enterprises of the primary industries of the real sector, such as manufacturing, retail and wholesale trade, construction, and service sector, including financial services provided, among others, by credit and insurance organizations and private pension funds holding important positions in the national classification of economic activity.

The empirical base of the study is the information contained in actual estimates and expectations of economic agents in the primary industries of the real sector and services sector, including the financial services, as well as of participants of investment activities and small businesses collected during regular, real-time and large-scale surveys of the business climate in the country. The basis of the information content of this integrated monitoring is opinions of respondents allowing to assess short-term trends and prevailing scales of sectoral situations: demand – supply, economic situation – competitiveness, risk – income; sectoral behavioral models: business activity – availability of resources – market stability. At the same time, based on the survey data, it is possible to determine in sectoral and territorial terms the inflationary component, the ratio of export and import trends, employment strategy, investment opportunities and needs, key trends in the credit and deposit and insurance markets, key barriers to improvement of the business climate and balanced sectoral structure of the economic growth. Using business tendencies monitoring also provides the opportunity to expand the information capabilities of business cycle analysis in the dynamics of national macroeconomic aggregates through joint assessment with cyclical profiles in the context of temporal trajectories of composite indicators of sectoral surveys.

Thus, the results of business tendencies surveys conducted by the Federal State Statistics Service using methodology designed by the Center for Business Tendency Studies ISSEK HSE were used to form and greatly expand the non-quantitative information database, whose spatial and temporal structure corresponds to simple and composite indicators reflecting, in accordance with the surveys program, sentiment of economic agents in various sectors of Russia's economy in 1998-2013. The accumulation of primary current information on short-term business trends is implemented through sectoral monitoring of business climate in manufacturing, construction, retail and wholesale trade, services, leasing and investment activities with a total coverage of a stratified sample of over 30 thousand objects of observation in almost all regions of the country, which undoubtedly increases the importance of the practical results of this study. During the 2013 pilot survey of the business climate in the financial services market, further information was collected that assessed current and expected trends and the extent of activity of credit and insurance organizations and private pension funds.

The methodology of sectoral business tendencies monitoring is based on the international practice of this kind of surveys taking into account the peculiarities of the modern Russian economy. It is developed and updated using the scientific and practical resources of the National Bureau of Economic Research (NBER, USA), ifo Institute (Germany), KOF ETH (Switzerland), ISAE (Italy), harmonized standards of the European Commission and OECD, whose long-term observations confirm the importance and breadth of their use in system of regulation of market economies.

Methods used in the study are the basic provisions of mathematical statistics, specifically statistical analysis of nonparametric data; econometric methods of decomposing the dynamics of cyclical indicators using state space model as a representation form of time series with unobserved cyclical component; dynamic factor models for constructing composite indicators.

In order to further improve the empirical significance of the data of sectoral business tendencies monitoring in the economic analysis, subjects of the study included examining the possibility of updating methodological support, and tasks were formulated allowing to estimate the extent to which national research is compatible with international standards and recommendations. In this regard, such methodological aspects were considered as the quality and completeness of the information obtained, methods of minimizing displacement in percentage distribution of respondent assessments; processing missing answers; factors (methods) that affect (eliminate) incomplete filling of questionnaires; procedures for rounding and quantifying results; seasonal smoothing of dynamics with regard to recent values; presence of local outliers and single effects. In this context, the wide use of the guidelines published by OECD and the European Commission, whose prolonged and large-scale activity in this area can no doubt serve as a reference practice, is mainly aimed at expanding the possibilities of qualitative cross-country comparisons of the research data collected by CBTS ISSEK with international analogs and, accordingly, developing a unified approach to business tendencies monitoring.

A separate subject of the research involves the study of those innovations in the practice of business surveys in European countries that are relevant to sectoral business climate monitoring in Russia.

Main recommendations in this regard to better understand the nature of the information collected and to use it in actual economic practice include solving following local problems:

  • organizing monitoring of cyclical features in the dynamics of inventories, in particular, showing gaps between inventory levels estimates and business intentions of economic agents as an additional indicator of entrepreneurial behavior with high sensitivity to cyclical fluctuations in economic dynamics;
  • analyzing current and earlier, compared to conventional statistics, assessments of changes in sectoral labor markets that characterize the balance between supply and demand of labor in the economy;
  • conformity assessment of composite indicators showing dominant industry events, such as the Economic Sentiment Index (ESI HSE) and the Business Climate Index (BCI) in manufacturing, strength of national economic growth over short time intervals;
  • measurement of total sectoral competitiveness (in addition to standard methods), characteristics associated not only with price and cost factors, but also with assessments of changes in the quality and diversity of competing products;
  • development of a group of "shortage" indicators limiting economic growth in both the supply and demand, as well as determining the dependence and cyclic correlation of the time series of such indicators with the dynamics of reference sectoral indicators.

Analysis of changes in the spatio-temporal sets of the proposed indicators and their relation to real and previous sectoral events will substantially expand the information and practical significance of monitoring.

Research focus is on continuing the development of a set of cyclic indicators involving a group of composite indicators of business trends, allowing a deeper examination of the unevenness of economic development and its cyclical dynamics.  The main outcome of the study is to determine statistically significant cyclical profiles of composite indicators of sectoral business tendencies monitoring in coordination with the cyclic dynamics of sectoral and macroeconomic aggregates. According to this formulation of the problem based on the general concept formulated and integrated algorithm for constructing composite indicators, testing their dynamics for cyclic sensitivity through decomposition, an empirical test was carried out of the cyclic profile of the following series: ESI HSE and GDP Index, as well as BCI and GDP Index in 1998 - 2013. As a result, a high degree of compatibility was found in the dynamics of survey indicators and the leading nature of short cycle turning points relative to corresponding characteristics in the cyclic trajectory of the reference statistical macro-aggregates.

The total volume of information and analytical output, including the output of regular monitoring in the real sector, prepared as part of this study, was around 1,100 pages of text, tables, charts and graphs. Materials were published regularly in the national mass media (Kommersant, Vedomosti, Rossiyskaya Gazeta, RBC, Moscow News, Novaya Gazeta, etc.), regional print mass media and online. About 10 papers were published based on the study in Russian economic journals. All the analysis is available on the HSE website.

Based on the methodological and organizational tasks completed in the previous stage, regular publication of the Economic Sentiment Index (ESI HSE) was included in the Federal Program of Statistical Observation 2013, which confirms the usefullness of the study.

In this study, the international partners were Anna Stangl, leading expert of the business tendencies survey unit at IFO Institute, Munich, Germany, and Aloisio Campello, deputy director of the economic cycles department at the Brazilian Institute of Economics.

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