Understanding Business Expectations: Understanding Business - PowerPoint PPT Presentation

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 y g g y y acknowledged) acknowledged) March 31, 2010 March 31, 2010

Outline of Presentation • Business expectations Business expectations • What do they track? • Implications for forecasting economic activity • Implications for forecasting economic activity

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

The Business expectations – Business sentiments? Animal spirits? – Business intentions? B i i i ? – Business conditions: constraints, opportunities? t iti ? – Do we want short-term indicators of the economy or long term indicators? economy or long-term indicators?

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

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

The Business Exapectations Surveys in India in India • NCAER • FICCI FICCI • Dun & Bradstreet • CII • CII • RBI Industrial Outlook Survey

What do the surveys track?

NCAER’s Business Confidence Index • Four components: BCI = 0.25* Σ C i i=1,4 • Over the next six months: – Overall economic conditions – Financial position of the firm • Now: – Investment climate In estment climate – Capacity utilisation Note: NCAER-MasterCard Worldwide Index of Business Confidence since Oct 2009; NCAER-ET BCI previously till 2004

The NCAER Business Confidence Index 180 160 140 120 100 100 80 60 40 40 20 0 Jul Jul Jul 007 Oct 008 Oct 009 Oct 010 '07 Apr Apr Jan 20 Jan 20 A Jan 20 A Jan 20 Apr NCAER MasterCard B siness Confidence Inde from Oct 2009 NCAER-MasterCard Business Confidence Index from Oct 2009; NCAER-ET Business Confidence Index for previous quarters upto 2004

100 150 200 200 50 0 0 N ov '94 N D D ec '95 J an' 97 The BCI: a historical view M M ar'98 A Apr'99 A Apr '00 Apr '01 A Apr '02 A A Apr '03 A Apr '04 A Apr '05 A Apr '06 Apr '07 A Apr '08 A Apr 09 A

Monthly data 10 15 20 -5 0 5 Apr 9 95 The usual and unusual: IIP Mfg % YOY Apr 9 96 Apr 9 97 Apr 9 98 Apr 9 99 Apr 0 00 Apr 0 01 IIP G Apr 0 02 Apr 0 03 IIP Mfg Apr 0 04 g Apr 0 05 Apr 0 06 Apr 0 07 Apr 0 08 Apr 0 09

The peaks, troughs and the usual in sentiments sentiments Business Confidence Index % deviation from mean us ess Co de ce de % de a o o ea 40 40 30 20 10 0 0 -10 -20 -30 -40 40 -50 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 M A N D A A A A A A A A A A J

Other barometers of business sentiments sentiments Sensex %deviation from mean Sensex %deviation from mean 250 200 150 100 50 0 -50 50 -100 ov'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 Jan Ma No De Ap Apr Apr Apr Apr Apr Apr Apr Apr Apr Ap

The BCI responds to more than Sensex: % dev from mean Sensex: % dev from mean 40 40 250 250 30 200 20 150 150 10 ENSEX 100 0 BCI -10 50 50 SE -20 0 -30 -50 -40 40 -50 -100 ov'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 Ma No De Ap Ap Ja Ap Ap Ap Ap Ap Ap Ap Ap Ap

100 100 -60 -40 -20 40 20 40 60 60 80 0 D ec '95 D Sensex mirrors Dow-Jones: % YOY O c t'96 O Aug'97 A J u une'98 A Apr'99 J an '00 O c t' '00 J J ul '01 A pr '02 DJ J an '03 O c t '03 O Sensex J ul '04 J A pr '05 J an '06 O c t '06 O J J ul '07 A pr '08 J an '09 O c t '09 O

Downturn is accompanied by greater uncertainty uncertainty 3000 120 2500 100 2000 80 B C I 1500 60 C V 1000 40 500 500 20 20 0 0 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 A p r J a n ' M a r N o v D e c 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 CV BCI BCI

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

BCI and the First PC of Its Components Components 160 140 120 100 80 60 0 20 40 60 80 Slno BCI BCI zc1a zc1a First PC Weights: C1: 0.59, C2: 0.45, C3: 0.58, c4: 0.33

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

Implications to forecasting

Are expectations leading indicators of economic activity? of economic activity? Variable Order of Integration Causality to Granger test F (DF test) IIPMFG statistic OEC I(1) No 1.69 FIN I(1) No 2.08 IC IC I(0) I(0) Yes Yes 3 76** 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 Ln IIPMFG I(2) I(2) --- --- (deseasonalised)

The NCAER Business Confidence Index Index 180 160 140 120 100 80 60 40 40 20 0 007 Jul Oct 008 Jul Oct 009 Jul Oct 010 07 Apr Apr O O O A A Jan 20 Jan 20 Jan 20 Jan 20 Apr ' NCAER-MasterCard Business Confidence Index from Oct 2009; NCAER-ET Business Confidence Index for previous quarters upto 2004

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

Thank You