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Understanding Business Expectations: Understanding Business - - PowerPoint PPT Presentation

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Understanding Business Expectations: Understanding Business Expectations: Understanding Business Expectations: Understanding Business Expectations: The usual and unusual The usual and unusual By Shashanka Bhide By Shashanka Bhide By

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Understanding Business Expectations: Understanding Business Expectations: Understanding Business Expectations: Understanding Business Expectations: The usual and unusual The usual and unusual

By Shashanka Bhide By Shashanka Bhide By Shashanka Bhide By Shashanka Bhide NCAER NCAER

(Research assistance of Charu Jain and Kartikeya Rao is gratefully (Research assistance of Charu Jain and Kartikeya Rao is gratefully ( y g y ( y g y acknowledged) acknowledged)

March 31, 2010 March 31, 2010

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Outline of Presentation

  • Business expectations

Business expectations

  • What do they track?
  • Implications for forecasting economic activity
  • Implications for forecasting economic activity
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SLIDE 3

Business expectations: what are they? And why what are they? And why measure?

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The Business expectations

– Business sentiments? Animal spirits? B i i i ? – Business intentions? – Business conditions: constraints, t iti ?

  • pportunities?

– Do we want short-term indicators of the economy or long term indicators? economy or long-term indicators?

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The need for surveys

  • Business decisions Policy decisions

Business decisions, Policy decisions require data

  • There is a lot of ‘hard data’ but may not

reflect subjective business conditions

  • Hard data has limited information on

future course of business future course of business

  • The surveys may provide leading

y y p g indicators of business performance

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The hard data The hard data

  • The hard data is for the present and

comes with a lag – IIP – Exports/ imports Exports/ imports – Monetary variables Fiscal variables – Fiscal variables

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The Business Exapectations Surveys in India in India

  • NCAER
  • FICCI

FICCI

  • Dun & Bradstreet
  • CII
  • CII
  • RBI Industrial Outlook Survey
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SLIDE 8

What do the surveys track?

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SLIDE 9

NCAER’s Business Confidence Index

  • Four components: BCI = 0.25* ΣCi i=1,4
  • Over the next six months:

– Overall economic conditions – Financial position of the firm

  • Now:

In estment climate – Investment climate – Capacity utilisation

Note: NCAER-MasterCard Worldwide Index of Business Confidence since Oct 2009; NCAER-ET BCI previously till 2004

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The NCAER Business Confidence Index

180 100 120 140 160 40 60 80 100 20 40

007 '07 Jul Oct 008 Apr Jul Oct 009 Apr Jul Oct 010

NCAER MasterCard B siness Confidence Inde from Oct 2009

Jan 20 Apr Jan 20 A Jan 20 A Jan 20

NCAER-MasterCard Business Confidence Index from Oct 2009; NCAER-ET Business Confidence Index for previous quarters upto 2004

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The BCI: a historical view

200 150 200 100 50 N ov '94 D ec '95 an' 97 M ar'98 Apr'99 Apr '00 Apr '01 Apr '02 Apr '03 Apr '04 Apr '05 Apr '06 Apr '07 Apr '08 Apr 09 N D J M A A A A A A A A A A A

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The usual and unusual: IIP Mfg % YOY

20 15 5 10 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

  • 5

Apr 9 Apr 9 Apr 9 Apr 9 Apr 9 Apr 0 Apr 0 Apr 0 Apr 0 Apr 0 Apr 0 Apr 0 Apr 0 Apr 0 Apr 0

IIP G IIP Mfg

Monthly data

g

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The peaks, troughs and the usual in sentiments sentiments

Business Confidence Index % deviation from mean us ess Co de ce de % de a o

  • ea

40 10 20 30 40 40

  • 30
  • 20
  • 10
  • 50
  • 40

Nov'94 Dec'95 Jan' 97 Mar'98 Apr'99 Apr '00 Apr '01 Apr '02 Apr '03 Apr '04 Apr '05 Apr '06 Apr '07 Apr '08 Apr 09 N D J M A A A A A A A A A A A

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Other barometers of business sentiments sentiments

Sensex %deviation from mean Sensex %deviation from mean

250 100 150 200 50 50

  • 100
  • 50
  • v'94

ec'95 n' 97 ar'98 pr'99 r '00 r '01 r '02 r '03 r '04 r '05 r '06 r '07 r '08 pr 09 No De Jan Ma Ap Apr Apr Apr Apr Apr Apr Apr Apr Apr Ap

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The BCI responds to more than Sensex: % dev from mean Sensex: % dev from mean

40 250 20 30 40 150 200 250

  • 10

10

BCI

50 100 150

ENSEX

40

  • 30
  • 20
  • 50

50

SE

  • 50
  • 40
  • v'94

ec'95 n' 97 ar'98 pr'99 r '00 r '01 r '02 r '03 r '04 r '05 r '06 r '07 r '08 pr 09

  • 100

No De Ja Ma Ap Ap Ap Ap Ap Ap Ap Ap Ap Ap Ap

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Sensex mirrors Dow-Jones: % YOY

100 60 80 100 20 40 60 40

  • 20

D ec '95 O c t'96 Aug'97 une'98 Apr'99 an '00 c t' '00 J ul '01 pr '02 an '03 O c t '03 J ul '04 pr '05 an '06 O c t '06 J ul '07 pr '08 an '09 O c t '09

  • 60
  • 40

D O A J u A J O J A J O J A J O J A J O

DJ Sensex

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Downturn is accompanied by greater uncertainty uncertainty

2000 2500 3000 80 100 120 500 1000 1500

C V

20 40 60

B C I

500 v '9 4 c '9 5 ' 9 7 r '9 8 '9 9 '0 0 '0 1 '0 2 '0 3 '0 4 '0 5 '0 6 '0 7 '0 8 0 9 20 N o v D e c J a n ' M a r A p r A p r A p r A p r A p r A p r A p r A p r A p r A p r A p r

CV BCI CV BCI

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Sentiments not entirely romantic

120 80 100 40 60 20 94 95 6 97 98 99 99 00 1 02 02 03 4 05 05 06 7 08 08 09 N ov '9 Sep'9 Aug'9 M ay '9 M ar'9 F eb'9 O c t'9 J un '0 Apr '0 J an '0 O c t' '0 J ul '0 Apr '0 J an '0 O c t '0 J ul '0 Apr '0 J an '0 O c t '0 J ul '0

OEC FIN IC CAPUT OEC FIN IC CAPUT

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BCI and the First PC of Its Components Components

160 140 100 120 80 60 20 40 60 80 Slno BCI zc1a

First PC Weights: C1: 0.59, C2: 0.45, C3: 0.58, c4: 0.33

BCI zc1a

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Structure of expectations: correlation coefficients correlation coefficients

First Variable OEC FIN IC CAPUT BCI PC MBCI OEC 1.0000 FIN 0.9249 1.0000 IC 0.9291 0.9610 1.0000 CAPUT 0.7964 0.6451 0.5992 1.0000 BCI 0.9874 0.9589 0.9530 0.8011 1.0000 First PC 0.9869 0.9659 0.9665 0.7685 0.9985 1.0000 MBCI 0.7387 0.6726 0.6593 0.7700 0.7580 0.7427 1.0000

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Implications to forecasting

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Are expectations leading indicators

  • f economic activity?
  • f economic activity?

Variable Order of Integration (DF test) Causality to IIPMFG Granger test F statistic OEC I(1) No 1.69 FIN I(1) No 2.08 IC I(0) Yes 3 76** IC I(0) Yes 3.76** CAPUT I(0) No 0.14 BCI I(1) No 1.68 Ln MOEC I(1) No 0.65 Ln MFIN I(1) Yes 1.94 Ln MIC I(0) Yes 4.13** ( ) Ln CAPUT I(1) No 0.10 Ln MBCI I(1) No 0.65 Ln IIPMFG I(2) Ln IIPMFG (deseasonalised) I(2)

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The NCAER Business Confidence Index Index

180 120 140 160 40 60 80 100 20 40

007 07 Jul Oct 008 Apr Jul Oct 009 Apr Jul Oct 010 Jan 20 Apr ' O Jan 20 A O Jan 20 A O Jan 20

NCAER-MasterCard Business Confidence Index from Oct 2009; NCAER-ET Business Confidence Index for previous quarters upto 2004

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Some observations

  • BCI reflects the present level of

economic activity

  • It probably is also a leading indicator
  • It tells us a bit more than the SENSEX
  • Sentiments are driven by the micro level

conditions

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Thank You