1. German Federal Ministry of Economics German Federal Ministry of Finance Short-term economic indicators for business cycle analysis and forecasts as a basis for Economic and Fiscal Policy Making Presentation for the OECD STESWP meeting, 23 - 24 June 2008 Dr. Hartmut Hüsges, Federal Ministry of Finance Dr. Christhart Bork, Federal Ministry of Economics and Technology

2. Economic Analysis and Forecasts in the Government 1.Role and Purposes 2.Data Requirements 3.Crucial Developments German Federal Ministry of Economics German Federal Ministry of Finance

3. Purposes of observation, analysis and forecasting  Information about economic and fiscal developments  Support of macroeconomic and fiscal policy making  Set-up of federal and social security budgets German Federal Ministry of Economics German Federal Ministry of Finance

4. Purposes of observation, analysis and forecasting (cont.) Internal information :  Information of the Ministers about economic and fiscal development i.e. about -developments and perspectives in the economy -show options/consequences for policy formulation German Federal Ministry of Economics German Federal Ministry of Finance

5. Purposes of observation, analysis and forecasting (cont.) Internal information (cont.):  Set-up of the budget -Estimation of revenues -Estimation of expenditures German Federal Ministry of Economics German Federal Ministry of Finance

6. Purposes of observation, analysis and forecasting (cont.) Internal information (cont.):  Identification of economic policy areas of action -Diagnosis is a precondition for policy formulation -Formulation of policy targets -Preparation of measures / instruments -Simulation of policy impacts  Policy control / support of policy making German Federal Ministry of Economics German Federal Ministry of Finance

7. Purposes of observation, analysis and forecasting (cont.) External information:  Informing the public about economic development, interpretation  Informing the public about the economic and fiscal policy  Reporting to international institutions (EU, OECD, IMF) German Federal Ministry of Economics German Federal Ministry of Finance

8.  Federal Ministry of Economics and Technology is responsible for short and medium term projections. Other Ministries involved are mainly Federal Ministry of Finance, Federal Ministry of Health, Federal Ministry of Labour and Social Affairs, Office of the Chancellor. Responsibilities for analysis and forecasting German Federal Ministry of Economics German Federal Ministry of Finance

9. Periodicity of Forecasts –Very short term forecasts or “now-casting” Flash-estimate for each quarter –Short term projections January:annual economic report April: spring projection October: autumn projection –Medium and long term projections German Federal Ministry of Economics German Federal Ministry of Finance

10. Data requirements: System of National Accounts as a consistent analytical framework Business cycle indicators Other relevant data like exchange rates, interest rates, world market development, etc. German Federal Ministry of Economics German Federal Ministry of Finance

11. Business cycle indicators used: business climate, situation and expectations by sectors orders and production in industry orders and production in construction retail and wholesale trade export expectations foreign order, exports, imports, terms-of trade prices (e.g. raw materials, import/export prices, producer prices, consumer price index) labour market (e.g. employment, unemployment, demand and supply of labour) quarterly gross domestic product (GDP) and its components German Federal Ministry of Economics German Federal Ministry of Finance

12. Main principle of forecasting: Use the same approaches, methods, and indicators applied by the Federal Statistical Office for updating national accounts data (based on indicators until primary statistical data are available) German Federal Ministry of Economics German Federal Ministry of Finance

13. Examples: Estimation of value added in manufacturing industry retail sales German Federal Ministry of Economics German Federal Ministry of Finance

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16. Limitations GDP data subject to substantial revisions: Private Consumption (retail sales subject to enormous revisions) Exports, Imports (foreign trade statistics: problems of time consistency) Inventories (no data available, calculated as a residual) Investments in machinery and equipment (no data from primary statistics available; estimated by a commodity flow approach) Services sector (lack of information, use of auxiliary data, e.g. employment figures) German Federal Ministry of Economics German Federal Ministry of Finance

17. Examples: Revisions of retail sales index employment data German Federal Ministry of Economics German Federal Ministry of Finance

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20. Crucial developments At the expense of quality and accuracy: measures to reduce “bureaucracy burden” (reduction of sample size, raising threshold values for recording, administrative data replace primary statistics) more timeliness (quarterly GDP: discussion about t+45 vs. t+30) more completeness in national accounts – despite lack of statistical data (FISIM, immaterial investments, informal sector, discussion about recording human capital) German Federal Ministry of Economics German Federal Ministry of Finance

21. Our preference as forecasters High quality data with less revisions rather than more timely and more complete GDP data without statistical basis German Federal Ministry of Economics German Federal Ministry of Finance

22. Thank you for your attention! German Federal Ministry of Economics German Federal Ministry of Finance