European business cycle indicators. 1st quarter 2015.
Date: 2015-08-28
Institutions: Directorate-General for Economic and Financial Affairs
Subjects: business policy, economic analysis, economic cycle, economic forecasting, economic growth, economic indicator, economic policy, euro area, goods and services, macroeconomics, serial publication

Issue: 1st quarter 2015                                                        ISSN:1831-5704 

Developments in business and consumer survey data in 2015Q1 

  Both  the  EU  and  the  euro-area  Economic  Sentiment  Indicator  (ESI)  increased  over  the 
first quarter of 2015. In March 2015, the ESI scored rather comfortably above the long-
term average of 100 in both the EU (at 106.1) and the euro area (at 103.9). 

  At  EU  sector  level,  confidence  improved  markedly  among  consumers  and  in  the  retail 
trade  sector,  while  industry  confidence  improved  only  slightly  and  services  and 
construction confidence worsened over the quarter. Euro area developments were similar, 
except for stable confidence in construction. 

  Compared  to  December's  readings,  the  ESI  brightened  in  four  of  the  seven  largest  EU 
economies  (Italy,  Spain,  France  and  Germany).  By  contrast,  the  indicator  weakened  in 
the Netherlands, Poland and the UK. 

  Capacity utilisation in the manufacturing sector increased in the first quarter and currently 
stands  at  its  long-term  average  in  the  EU  and  the  euro  area.  In  the  services  sector, 
capacity utilisation remained stable in both areas, indicating a pause in the upward trend 
that started in early 2013. 

Highlight:  Revisiting  the  relation  between  inventories  and  production 
using survey data 

Using  data  from  the  manufacturing  survey  of  the  Joint  Harmonised  EU  Programme  of 
Business  and  Consumer  Surveys  (BCS),  this  highlight  section  investigates  the  impact  of 
developments in inventories on economic activity for the euro area at the level of both total 
manufacturing  and  main  industrial  groupings.  The  analysis  shows  that,  when  firms  assess 
stocks  as  being  "too  large",  they  react  by  cutting  production  in  the  following  months.  The 
opposite holds true when inventories are reported to be "too small". With the outbreak of the 
global  crisis,  the  negative  relationship  has  substantially  intensified,  suggesting  that 
production  in  manufacturing  has  become  more  sensitive  to  imbalances  between  inventories 
and expected demand. 

ESI and GDP growth for the EU 
(January 2005 to March 2015 for survey data) 

Note 1: The horizontal line (rhs) marks the long-term average (=100) of the sentiment indicator.  
Note 2: Both ESI and y-o-y GDP growth are plotted at monthly frequency. Monthly GDP data are obtained by linear 
interpolation of quarterly data. 

i

s
s
e
n
s
u
B
n
a
e
p
o
r
u
E

                      ‘

‘European Business 
Cycle Indicators’ 
provides short-term 
analysis based 
on Business and 
Consumer Survey data. 
It appears quarterly. 

European Commission 
Economic and Financial 
Affairs Directorate- 
General 
Directorate A – Policy 
strategy, coordination 
and communication 
Unit A4 – Economic 
situation, forecasts, business 
and consumer surveys 
http://ec.europa.eu/economy
_finance/db_indicators/index
_en.htm 

For questions, 
comments and further 
information, 
contact: Christian.Gayer@ 
ec.europa.eu 

KC-BA-15-001-EN-N 

© European Union 2015 

m
r
e
t
-
t
r
o
h
s

i

s
e
d
v
o
r
p

’

s
r
o
t
a
c
d
n
I

i

l

e
c
y
C

.

a

t

a

d

y

e

v

r

u

S

r

e

m

u

s

n

o

C

l

a

i

c

n

a

n

i

F

d

n

a

c

i

m

o

n

o

c

E

n

o

i

s

s

i

m

m

o

C

n

a

e

p

o

r

u

E

.

y

l

r

e

t

r

a

u

q

s

r

a

e

p

p

a

t

I

-

e

t

a

r

o

t

c

e

r

i

D

s

r

i

a

f

f

A

d
n
a
s
s
e
n
s
u
B
n
o

i

l

a

r

e

n

e

G

y

c

i

l

o

P

–

A

e

t

a

r

o

t

c

e

r

i

D

n

o

i

t

a

n

i

d

r

o

o

c

,

y

g

e

t

a

r

t

s

n

o

i

t

a

c

i

n

u

m

m

o

c

d

n

a

s

t

s

a

c

e

r

o

F

–

4

A

t

i

n

U

n

o

i

t

a

u

t

i

s

c

i

m

o

n

o

c

e

d

n

a

r

e

h

t

r

u

f

d

n

a

s

t

n

e

m

m

o

c

,

s

n

o

i

t

s

e

u

q

r

o

F

,

n

o

i

t

a

m

r

o

f

n

i

@

r

e

h

c

s

u

R

.

c

i

r

E

:

t

c

a

t

n

o

c

u

e

.

a

p

o

r

u

e

.

c

e

1

1

0

2

n

o

i

n

U

n

a

e

p

o

r

u

E

©

N

-

N

E

-

4

0

0

-

1

1

-

A

B

-

C

K

d
e
s
a
b

i

s
s
y
a
n
a

l

65758595105115-6-5-4-3-2-10123420052006200720082009201020112012201320142015% balancey-on-y % changeReal GDP growth (y-o-y)Economic Sentiment (rhs)ρ = 0.93 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Business Cycle Indicator  

1st quarter 2015                                                         

Contents 

1. 

2. 

3. 

Recent developments in survey indicators for the EU and the euro 
area ..................................................................................... - 3 - 

Recent developments in selected Member States ........................ - 6 - 

Highlight: Revisiting the relation between inventories and production 
using survey data ................................................................... - 7 - 

Annex 1: The Economic Climate Tracer ............................................ - 12 - 

Annex 2: Reference series ............................................................. - 14 - 

- 2 - 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
European Business Cycle Indicator  

1st quarter 2015                                                         

1.  Recent  developments  in  survey  indicators 

for the EU and the euro area 

After  the  flat  development  over  the  last  quarter  of 
2014, the EU and the euro-area Economic Sentiment 
Indicators (ESI) embarked on an upward trend in the 
first quarter of 2015, improving for three months in a 
row.  At the end of  the first quarter  of 2015,  the  ESI 
scored  rather  comfortably  above  the  long-term 
average  of  100  in  both  the  EU  (at  106.1)  and  the 
euro area (at 103.9).  

Compared  to  the  readings  at  the  end  of  the  fourth 
quarter  of  2014,  the  ESI  registered  significant  gains 
in  the  EU  (+1.9  points)  and  the  euro  area  (+3.0 
points).  The  positive  signals  were  echoed  by  the  Ifo 
Business  Climate  Index  (for  Germany)  and  Markit 
Economics'  Composite  PMI  for  the  euro  area,  which 
also improved over the first quarter of 2015.  

At  EU  sector  level,  the  positive  development  of  the 
sentiment indicator over the first quarter was fuelled by 
confidence  increases  among  consumers  and  managers 
in  the  retail  trade  sector,  while  sentiment  in  industry 
improved  only  slightly.  By  contrast,  the  services  and 
construction  confidence  indicators  are  now  at  a  lower 
level than at the end of 2014. In the euro area, sectoral 
developments  paralleled  those  in  the  EU,  except  for 
confidence  in  construction,  which  remained  unchanged 
compared  to  the  end  of  2014.  In  terms  of  levels,  all 
sectoral  EU  indicators  currently  score  around  or  above 
their corresponding historical mean. For the euro-area, 
services and construction confidence remain below their 
long-term average.  

At  country  level,  sentiment  improved  in  four  of  the 
seven largest EU economies compared to December, 
namely  in  Italy  (+7.2),  Spain  (+3.5),  France  (+2.6) 
and Germany (+1.7). The Netherlands (-0.8), Poland  
(-1.0) and the UK (-2.2), by contrast, saw sentiment 
worsening.  

Sector developments 

The  improvement  of  economic  sentiment  in  the  first 
quarter is clearly dominated by consumer confidence 
and  confidence  in  the  retail  sector.  This  is  likely  to 
reflect  to  a  large  extent  the  increase  in  households' 
real  incomes  related  to  the  sharp  drop  in  energy 
prices  since  last  summer.  By  contrast,  confidence  in 
the  industry  and  services  sectors  has  been  moving 
sideways  for  more  than  a  year  now,  pointing  to  a 
modest  pace  of  growth.  Looking  ahead, 
the 
assessment of domestic and export orders as well as 
managers'  expectations  suggest  positive  economic 
developments  in  the  euro  area,  while  they  remain 
broadly  flat  in  the  EU.  Moreover,  the  fact  that 
capacity  utilisation  has  increased  back  to  its  long-
term  average  in  manufacturing  may  indicate  some 
scope  for  a  pick-up  of  equipment  investment  in  the 

quarters ahead. Price expectations appear to point to 
a  bottoming-out  of  the  negative  inflation  rates 
induced  mainly  by  falling  energy  and  food  prices  in 
recent  months.  Finally,  employment  is  expected  to 
increase across all the sectors in the euro area, while 
in  the  EU  prospects  are  less  positive  in  particular  in 
retail trade and in construction. 

Over the first quarter of 2015, industrial confidence 
in the EU was on a moderate upward trend, while in 
the  euro  area  it  improved  slightly  in  January, 
remained  broadly  stable  in  February  and  picked  up 
strongly  in  March.  On  balance,  a  comparison  of 
March's  readings  to  those  of  last  December  shows 
the  indicator  having  booked  increases  in  the  EU 
(+0.7 points) and, in particular, the euro area (+2.1 
points).  

both 

European 

In 
aggregates,  managers' 
assessments  of  order  books  and  the  stocks  of 
finished  products  improved  over  the  quarter,  while 
production  expectations  improved  in  the  euro  area, 
but  remained  broadly  stable  in  the  EU.  Managers' 
appraisals  of  past  production  trends  were  revised 
upwards  in  both  areas,  while  their  views  on  export 
order books improved in the euro area, but worsened 
in  the  EU.  In  March,  selling  price  expectations  were 
at  a  lower  level  than  in  December  in  both  areas. 
However,  the  monthly  profile  saw  price  expectations 
edging up in February and, in the EU, also in March. 
Managers' 
improved 
markedly  over  the  first  quarter  in  the  euro  area, 
while they remained broadly unchanged in the EU. In 
the seven largest EU countries, compared to the end 
of  the  fourth  quarter  2014,  industry  confidence 
increased  strongly  in  Italy  and  Spain  (by  more  than 
3.5  points).  Confidence  improved  also  in  Germany 
and  France  (by  around  two  points).  By  contrast,  it 
worsened  in  the  Netherlands  and  the  UK  and 
remained stable in Poland. 

expectations 

employment 

The latest readings from the quarterly manufacturing 
survey  showed that,  compared  to the last quarter of  
2014,  capacity  utilisation 
in  manufacturing 
increased by 0.6 and 0.7 percentage points in the EU 
and  the  euro  area  respectively.  In  both  areas  the 
level  of  capacity  utilisation  was  81.0%  in  January, 
corresponding  to  the  long-term  average  for  both 
areas (EU 80.8%; euro area 81.2%). 

Confidence  in  services  decreased  somewhat  over 
the  first  quarter  of  2015.  The  EU  currently  scores 
around its historical average, while confidence in the 
euro area remains below its long-term mean. Having 
decreased 
in  January,  services 
confidence in the euro area stabilised in February and 
edged  up  in  March,  while,  in  the  case  of  the  EU,  it 
continued declining in February and only stabilised in 
March.  

in  both  areas 

- 3 - 

 
 
European Business Cycle Indicator  

1st quarter 2015                                                         

Graph 1.1: Sectoral confidence indicators and reference series for the EU 
(January 2005 to March 2015 for survey data) 

Note 1: The horizontal line (rhs) marks the long-term average of the survey indicators. 
Note 2: Confidence indicators are expressed in balances of opinion and hard data in y-o-y changes. If necessary, 
monthly frequency is obtained by linear interpolation of quarterly data. 

- 4 - 

-50-40-30-20-10  0 10 20-22-18-14-10-6-22610200520072009201120132015IndustryIndustrial production growthIndustrial Confidence (rhs)-40-30-20-10  0 10 20 30-9-6-3036200520072009201120132015ServicesServices value added growthService Confidence (rhs)-40-35-30-25-20-15-10- 5  0  5 10-7-5-3-113579200520072009201120132015ConsumersConsumption growthConsumer Confidence (rhs)-60-50-40-30-20-10  0 10 20-14-10-6-22610200520072009201120132015ConstructionConstruction production growthConstruction Confidence (rhs)-30-25-20-15-10- 5  0  5 10 15-3-2-10123200520072009201120132015RetailConsumption growthRetail Confidence (rhs)-35-25-15-5515253545-35-25-15-5515253545200520072009201120132015Financial servicesFinancial Services Confidence (from April 2006)-50-40-30-20-10  0 10-12-10-8-6-4-202200520072009201120132015Employment -IndustryEmployeesmanufacturing -growthEmploymentexpectations -Industry (rhs)-30-20-10  0 10 20 30-3-2-1012345200520072009201120132015Employment -ServicesEmployees services -growthEmploymentexpectations -Service (rhs) 
 
 
 
 
 
 
 
 
 
European Business Cycle Indicator  

1st quarter 2015                                                         

Graph 1.2: Economic Sentiment Indicator — Selected EU Member States 
(January 2004 to December 2014 for survey data) 

Note 1: The horizontal line marks the long-term average (=100) of the sentiment indicator.  
Note 2: Confidence indicators are expressed in balances of opinion and GDP in y-o-y changes. Both variables are plotted at 
monthly frequency. Monthly GDP data are obtained by linear interpolation of quarterly data. 

- 5 - 

 60 70 80 90 100 110 120-6-4-20246200520072009201120132015Euro areaGrowthEconomic Sentiment (rhs) 60 70 80 90 100 110 120-8-6-4-20246200520072009201120132015GermanyGrowthEconomic Sentiment (rhs) 60 70 80 90 100 110 120-6-4-2024200520072009201120132015FranceGrowthEconomic Sentiment (rhs) 50 60 70 80 90 100 110 120 130-8-6-4-20246200520072009201120132015United KingdomGrowthEconomic Sentiment (rhs) 60 70 80 90 100 110 120-8-6-4-2024200520072009201120132015ItalyGrowthEconomic Sentiment (rhs) 60 70 80 90 100 110 120-6-4-20246200520072009201120132015SpainGrowthEconomic Sentiment (rhs) 60 70 80 90 100 110 120-6-4-20246200520072009201120132015The NetherlandsGrowthEconomic Sentiment (rhs) 60 70 80 90 100 110 120 130-11357200520072009201120132015PolandGrowthEconomic Sentiment (rhs) 
 
 
 
 
 
 
 
 
 
 
 
European Business Cycle Indicator  

1st quarter 2015                                                         

As  for  the  individual  components  of  the  confidence 
index,  in  both  areas  managers'  views  on  the  past 
business situation improved, while past and expected 
demand  worsened.  The  decline  was  particularly 
pronounced  in  the  case  of  EU  managers'  demand 
expectations.  Looking  at  the  largest  EU  countries, 
compared  to  December  2014,  confidence  rallied  in 
Italy  (+7.6),  while  it  only  improved  moderately  in 
Germany (gains of 0.6 points) and remained broadly 
unchanged  in  the  Netherlands.  France,  Poland  and 
the  UK  saw  the  indicator  decreasing  by  around  2½ 
percentage  points.  Confidence  decreased  also  in 
Spain  (-3.3)  offsetting  however  only  partly  the 
important gains registered in the previous quarter.  

The  latest  readings  of  the  quarterly  survey  on 
capacity  utilisation  in  services  indicated  a  pause 
in  the  upward  tendency  that  had  started  in  early 
2013,  with  both  the  EU  and  the  euro  area  indicator 
remaining  broadly  stable  at  88.5%  and  87.8%, 
respectively. 

Retail trade confidence increased in the first quarter 
of 2015 in both the EU and the euro area. While the 
improvement  in  the  EU  resulted  from  increases  in 
January and March, which were  only  partly offset  by 
a  drop  in  February,  the  euro  area  scored  three 
increases  in  a  row.  Improved  confidence  in  both 
areas  resulted  from  positive  developments  in  all 
three  components  of  the  indicator,  i.e.  managers' 
appraisals of the past and expected business activity, 
as well as their views on the adequacy of the volume 
of  stocks.  From  a  country  perspective,  confidence 
improved  markedly  in  France,  Germany  and  Spain 
(+7.3,  +4.9  and  +4.6  points  compared 
to 
December),  and,  less  so,  in  Italy.  By  contrast,  it 
remained  broadly  stable  in  Poland,  while  decreasing 
in the Netherlands and the UK. 

Compared  to  the  end  of  2014,  confidence 
in 
construction  worsened in the EU, while it remained 
unchanged in the euro area. From a month-on-month 
perspective, both areas saw the indicator dropping in 
January  (especially  in  the  EU).  Subsequently,  the 
euro  area  indicator  remained  stable  in  February  and 
edged  up  in  March,  while  EU  confidence  saw  an 
improvement in February, which was, however offset 
by  a  loss  in  March.  In  the  EU,  both  components  of 
the  indicator  -  managers'  views  on  current  order 
books and their employment expectations – declined. 
In  the  euro  area,  managers'  assessments  of  their 
current  order  books  remained  broadly  stable  and 
employment expectations increased slightly. Focusing 
on  individual  countries,  the  indicator  picked  up 
markedly  in  Italy  and  Spain  and,  to  a  lesser  extent, 
in  the  Netherlands  and  Poland.  By  contrast,  it 
deteriorated  in  Germany,  France  and  the  UK.  In 
Germany  and  the  UK,  in  spite  of  particularly  strong 
losses, the indicator remained at high levels.  

In both the EU and the euro area, confidence among 
consumers improved markedly in the first quarter of 

(consumers'  expectations  about 

2015,  resulting  from  improvements  in  all  three 
months  of  the  quarter.  This  pattern  was  backed  by 
strong  improvements  in  all  four  components  of  the 
indicator 
their 
personal  financial  situation,  the  general  economic 
situation,  unemployment  and  savings).  Consumers 
were  particularly  more  optimistic  about  the  future 
general economic situation and future unemployment 
developments.  Confidence  improved  in  all  of  the 
seven  largest  EU  Member  States,  except  for  Poland, 
where  the  indicator  remained  virtually  unchanged 
compared to December 2014.  

EU  and  euro-area  confidence  in  financial  services 
(not  included  in  the  ESI)  improved  over  the  first 
quarter  of  2015,  continuing  the  upward  trend 
observed  since  the  end  of  2012.  In  the  EU,  the 
increase  was  backed  by  managers'  more  positive 
answers  to  all  questions  feeding  into  the  indicator 
construction,  while,  in  the  euro  area,  confidence 
increased thanks to managers' more optimistic views 
on expected demand, which was partially offset by a 
slight  downward  revision  of  their  appraisal  of  past 
demand and the past business situation. 

The  developments  in  survey  data  over  the  first 
quarter are illustrated by the evolution of the climate 
tracers.  After  several  months  in  the  region  between 
the  expansion  and  the  downswing  quadrant,  the 
economic  climate  tracer  for  the  EU  moved  more 
clearly into the expansion quadrant (see Annex 1 and 
Annex  2  for  further  details).  This  movement  was 
driven  mainly  by  the  climate  tracers  for  consumers 
and  the  retail  trade  sector.  The  climate  tracers  for 
industry  and  services  have  settled  just  between  the 
downswing  and  the  expansion  areas,  while  the 
climate  tracer  for  construction  remained  in  the 
upswing  area,  moving  into  the  direction  of  the 
intersection  of  the  two  axes,  which  hints  at  a  stable 
situation  around  the  historic  average  level.  Also  for 
the euro area, the overall economic climate tracer is 
located in the expansion quadrant. In contrast to the 
EU,  the  euro-area  climate  tracer  for  the  service 
sector is just on the border between the upswing and 
the  contraction  areas  and  the  construction  climate 
tracer  is  in  the  upswing  quadrant,  but  approaching 
the expansion area more clearly than in the EU.  

2.  Recent  developments  in  selected  Member 

States  

During  the  first  quarter  of  2015,  sentiment  has 
improved strongly in Italy and Spain and - to a lesser 
extent  -  in  France  and  Germany,  while  it  has 
deteriorated  in  the  Netherlands,  Poland  and  the  UK. 
The  sentiment  index  scored  above  its  long-term 
average  in  Germany,  Italy,  Spain,  the  Netherlands 
and the UK.  

- 6 - 

 
 
European Business Cycle Indicator  

1st quarter 2015                                                         

In Germany, the ESI increased in the first quarter of 
2015  compared  to  the  end  of  2014,  thanks  to  a 
sizeable increase in March 2015. The indicator is now 
well  above  its  long-term  average  of  100,  at  105.1 
points.  Confidence  improved  among  consumers  and 
in all business sectors except for construction, which 
dropped over the quarter and is now 5.3 point lower 
than  at  the  end  of  2014.    In  terms  of  the  climate 
tracer, Germany is moving from the downswing area 
directly to the expansion quadrant, an indication that 
growth should be firming further.  

Economic  sentiment  in  France  improved  over  the 
first  quarter;  the  indicator  increased  in  all  three 
months,  but  gains  were  particularly  significant  in 
February.  At  98.5  points,  however,  the  sentiment 
index remains clearly below its long-term average of 
100.  Confidence  worsened 
in  construction  and 
services,  while  it  improved  in  the  other  business 
sectors  and  among  consumers.  The  climate  tracer  is 
getting closer to the expansion quadrant, pointing to 
the potential for a growth rebound.  

Sentiment  in  Italy  rose  in  all  three  months  of  the 
quarter,  resulting  in  a  marked  increase  compared  to 
December  2014.  The  sentiment  index  is  now  well 
above its long-term average of 100, at 106.1 points. 
At  sector  level,  confidence  improved  markedly  in  all 
the  business  sectors  and  among  consumers,  where 
the  improvement  has  been  particularly  strong.  The 
climate  tracer  on  the  border  between  the  upswing 
and  the  expansion  areas  also  points  to  a  gradual 
return to growth.  

Also  the  ESI  in  Spain  improved  compared  to 
December  2014,  thanks  to  gains  registered  in  all 
three  months  of  the  quarter.  At  109.1  points,  the 
sentiment  indicator  is  well  above  its  long-term 
average  of  100.  Confidence  decreased  in  services, 
while  it  registered  solid  gains  in  all  remaining 
business  sectors  and  among  consumers.  Notably 
confidence in retail trade reached its historical high in 
March  2015  (at +14.5).  The  climate tracer for  Spain 
moved  further  into  the  expansion  area  indicating  a 
sustained recovery. 

In  the  Netherlands,  sentiment  worsened  over  the 
first  quarter  of  2015.  The  ESI  decreased  in  January 
and  February,  while  it  increased  in  March.  At  102.6, 
the indicator remains above its long-term average. At 
sector level, sentiment improved in  construction and 
among  consumers,  while  confidence  declined  in 
industry and retail trade and remained broadly stable 
in  services.  The  climate  tracer  remains  in  the 
expansion  quadrant,  but  close  to  the  downswing 
area. 

In the United Kingdom, sentiment decreased in the 
first  quarter  compared  to  December  2014,  due  to  a 
sharp  drop  in  March  that  offset  a  slight  increase 
indicator 
in  January.  Nevertheless,  the 
booked 
remains  well  above  its  long-term  average  of  100,  at 
111.1.  Worsened  sentiment  resulted  from  clear 

downward revisions in all the business sectors, which 
were  only  partially  offset  by  improvements  among 
consumers.  The  climate  tracer  in  the  downswing 
quadrant also points to a maturing cycle. 

Sentiment in Poland worsened in January, improved 
in  February  and  registered  another  decrease  in 
March,  resulting  in  an  overall  decline  compared  to 
December 2014. The ESI continues to score below its 
long-term  average  at  98.7.  At  sector 
level, 
confidence  decreased  in  services,  while  it  remained 
broadly unchanged in industry and among consumers 
and improved slightly in retail trade and construction. 
Also  for  Poland,  which  has  registered  very  robust 
GDP  growth  in  recent  quarters,  the  climate  tracer  is 
moving closer to the downswing quadrant.  

3.  Highlight:  Revisiting  the  relation  between 
inventories  and  production  using  survey 
data 

One  of  the  main  interests  of  macroeconomists  is  to 
understand  which  economic  variables  drive  business 
cycle  developments  and  to  gauge  the  relative 
magnitude  of  their 
impacts.  Since  Abramowitz 
(1950),1  it  is  well-known  that  inventories  are  an 
important  determinant  of  economic  fluctuations: 
Inventory  build-ups  reinforce  the  economy  during 
expansions,  while  inventory  liquidations  tend  to 
exacerbate  recessions.  A  clear  understanding  of  the 
relationship  between 
inventories  and  economic 
output  is  thus  key  to  grasping  the  underlying 
dynamics of the business cycle. 

If 

the 

logic: 

two  variables  mainly 
the  stock  of 

The vast majority of pre-crisis studies on the subject 
is  set  in  a  framework  where  conceivable  links 
between 
follow  an 
inventories 
accounting 
increases,  this  must,  ceteris  paribus,  be  reflected  in 
an increase in aggregate output.2 Departing from the 
observation that average volatility levels of GDP have 
studies 
declined 
investigate  whether 
this  observation  can  be 
explained,  inter  alia,  by  reduced  volatility  levels  in 
inventory  growth.  The  latter  might  be  caused  by 

the  mid-eighties, 

since 

the 

1  Abramowitz,  M.  (1950),  Inventories  and  Business  Cycles. 
National Bureau of Economic Research, New York. 
2  See,  among  others,  Filardo,  A.J.  (1995),  “Recent  Evidence 
on the Muted Inventory Cycle”, Federal Reserve Bank of 
Kansas  City  Economic  Review,  2,  27-43;  Ahmed,  S., 
Levin,  A.  and  Wilson,  B.A.  (2004),  "Recent  U.S. 
Macroeconomic Stability: good Policies, Good Practices, 
or Good Luck?", Review of Economics and Statistics, 86, 
824-832;  McCarthy,  J.  and  Zakrajšek,  E.  (2007),. 
"Inventory  Dynamics  and  Business  Cycles:  What  has 
Changed?",  Journal  of  Money,  Credit  and  Banking,  39, 
591-613. 

- 7 - 

 
                                                           
European Business Cycle Indicator  

1st quarter 2015                                                         

advances in information technology fostering just-in-
time inventory management.  

In  this  highlight  section,  the  relation  between 
inventories and output is approached from a different 
angle.  The  research  question  addressed  is  whether 
and  to  what  extent  the  perceived  affluence  (or 
scarcity)  of  today's  inventories  in  the  light  of 
expected  demand  has  a  bearing  on  tomorrow's 
production  levels.  Clearly,  the  underlying  economic 
rationale  is  that  since  inventories  are  costly,  binding 
financial resources and warehouse space, they should 
not be larger than necessary to meet demand in the 
short-term.  

Since  the  reaction  of  firms  to  variations  in  the 
perceived  appropriateness  of 
inventories  might 
change  depending  on  the  economic  circumstances, 
the  subsequent  analysis  pays  special  attention  to 
periods  of  economic turmoil  (2008/09  financial  crisis 
and  ensuing  sovereign  debt  crisis),  where  demand 
has been subject to drastic changes.  

Data 

The  variable  chosen  to  represent  the  affluence  (or 
scarcity)  of  inventories  in  the  light  of  expected 
demand 
is  question  4  of  the  EU  harmonised 
manufacturing  survey.  The  question  asks  managers 
for  an  assessment  of  the  current  stock  of  finished 
products,  with  the  three  answering  categories  "too 
large  (above  normal)",  "adequate  (normal  for  the 
season)"  and  "too  small  (below  normal)".  As  is 
readily  apparent,  the  variable  does  not  only  capture 
the level of inventories, but also the appropriateness 
of  that  level  ("too  large",  "adequate",  "too  small"). 
Assuming that responding firms think in particular of 
expected demand levels when they evaluate whether 
a given level of inventories is appropriate, question 4 
can  be  considered  a  good  proxy  of  the  affluence  / 
scarcity  of  inventories  in  the  light  of  expected 
demand.  

The  second  component  for  our  analysis,  the  level  of 
production,  is  measured  by  question  1  of  the  EU 
harmonised  manufacturing  survey.  It  inquires  the 
development  of  production  over  the  past  3  months, 
with the answering categories "increased", "remained 
unchanged" and "decreased".  

Since  the  two  questions  refer  to  different  time-
horizons,  the  latter  must  be  "aligned"  before  the 
analysis  can  be  conducted.  To  do  this,  quarterly 
figures are derived from monthly data as follows: For 
past production, managers' assessments in quarter t 
are represented by the indicator's reading in the last 
month  of  that  quarter  (i.e.  the  March  value 
represents quarter 1, the June value quarter 2, etc.). 
The intuition is that the survey question inquires the 
developments in production over the "past 3 months" 
so  that  the  value  for  the  third  month  adequately 
represents  the  developments  over  the  quarter.  By 

contrast,  in  the  case  of  the  inventories  question, 
the  current 
which 
situation,  the  average  of  three  monthly  readings  is 
considered to represent a given quarter. 

inquires  an  assessment  of 

the 

variable 

vis-à-vis 

Since  the  present  analysis  focusses  on  the  effect  of 
changes  in  inventories  on  production  developments, 
its  set-up  needs  to  ensure  the  anteriority  of  the 
inventories 
production 
question.  Practically,  the  calculation  of  the  quarterly 
averages  of  the  inventories  variable  is  based  on 
monthly stocks data shifted two months ahead. Thus, 
quarter 1 of a given year corresponds to the average 
of  November,  December  and  January,  etc.  The 
reason  for  shifting  the  data  by  two  rather  than  just 
one month is that the period considered by a firm in 
answering  the  survey  question  on  production  "over 
the  past three  months"  is  not  entirely  clear-cut.  If  a 
firm  is  surveyed  at  the  beginning  of  a  month,  the 
assessment might include developments over the last 
month  of  the  preceding  quarter,  while  this  is  less 
likely  when  the  survey  is  conducted  more  towards 
the  middle  of  the  month.  By  shifting  the  inventories 
series two months ahead, its anteriority is ensured in 
all conceivable scenarios. 

Results for the aggregate manufacturing sector 

Graph  3.1  plots  (the  first  differences  of)  euro-area 
past  production  (Δpro)  against  inventories  (Δinv) 
over  the  sample  from  1990q2  to  2014q4.  It  clearly 
emerges  that  there 
is  a  negative  relationship 
between  the  two:  A  quarter-on-quarter  (q-o-q) 
increase in the relative share of enterprises reporting 
to have "too large" stocks is associated with a q-o-q 
decrease  in  the  relative  share  of  businesses  with 
increased production.  

Graph 3.1:  Changes  in  Production  vs.  changes 
in Inventories 

Source: European Commission. 

Since  the  inventories  variable  is  constructed  on  the 
basis  of  observations  being  moved  two  months 
ahead,  the  scatter  plot  suggests  that  if  enterprises 
notice that their stocks are "too large", they decrease 
their production in the following months so as to re-
establish an appropriate relation between the two. To 

- 8 - 

 
 
European Business Cycle Indicator  

1st quarter 2015                                                         

better  formalise  the  results,  the  following  bi-variate 
regression is run: 

Δpro(t) = c1+ c2×Δinv(t)+e(t)  

(1) 

expressing  changes  in  production  by  changes  in 
inventories  and  a  constant.  In  condition  (1),  t 
indicates  the  calendar  quarter  of  reference  and  e(t) 
represents the error term. 

The  estimation  results  for  the  full  sample  are 
collected  in  column  "ALL"  of  Table  3.1.,  where 
heteroskedasticity  and  autocorrelation  consistent 
(HAC)  standard  errors  are  in  parentheses.  The 
bottom  part  of  the  Table  reports  some  diagnostic 
tests  and  statistics,  namely  the  no  serial  correlation 
residual  test  (up  to  the  fifth  order)  (LM(5)),  the 
Jarque-Bera  normality  test  (JB),  the  F-test  for  the 
joint  non-significance  of  regressors,  with  p-values  in 
square brackets, the standard error of regression (SE 
Regr.) and the overall goodness of fit statistics (Adj. 
Rsq).  

Table 3.1:  Regression 
2014q4): aggregate manufacturing sector 

results 

(1990q2 

to 

ALL 

ALL-pre 

ALL-post 

c1 

c2 

LM(5) 

JB 

F 

SE Regr. 

Adj. Rsq 

-0.093 

(0.476) 

-1.699 

(0.205) 

[0.097] 

[0.002] 

[0.000] 

5.127 

0.372 

-0.015 

(0.436) 

-1.372 

(0.181) 

[0.002] 

[0.832] 

[0.000] 

4.538 

0.286 

-0.318 

(0.671) 

-2.172 

(0.248) 

[0.119] 

[0.351] 

[0.000] 

6.338 

0.499 

Source: European Commission. 

The  evidence  shows  that,  if  the  q-o-q  change  in  the 
share of enterprises reporting "too large", rather than 
"too small", inventories grows by 1 percentage point 
(pp), this translates into a 1.7 pp increase in the q-o-
q  change  of  the  share  of  enterprises  reducing  their 
production.  As  the  Table  shows,  the  results  are 
significant at the 1% significance level.  

As  stated  in  the  introduction,  the  present  analysis 
aims to also inquire whether inventories help explain 
the  increased  output  volatility  witnessed  in  the 
course  of  the  financial  and  ensuing  sovereign  debt 
crisis. To this end, multiple re-runs of the regression 
are  performed,  extending  every  time  the  sample 
span  by  one  observation  (recursive  estimation) 
starting  from  the  period  1990q2-2005q1.  Graph  2 
plots  how  the  estimate  of  the  coefficient  on 
inventories  changes  over  time,  together  with  the 
90% significance interval (grey area). 

The  first  chunk  of  estimations  shows  the  coefficient 
relatively  stable  around  -1.4.  When  estimations 
include  2008q4  for  the  first  time  though,  the 
coefficient  drops  sharply.  Subsequent  extensions  of 
the sample period aggravate the drop. From 2010q1 
onwards, the coefficient settles at around -1.7. 

the 

relation  between 

These findings suggest a number of conclusions: First 
of  all, 
inventories  and 
production,  while  usually  rather  constant  over  time, 
has  turned  more  negative  in  recent  years.  When 
firms consider their inventories affluent compared to 
expected  demand,  production  is  driven  down  more 
sharply than in previous years.  

A second observation concerns the magnitude of the 
change.  With  the  coefficient  on  the  effect  of 
inventories  on  production  decreasing  by  some  25% 
(from roughly -1.4 to -1.7), the change appears non-
negligible.  

Thirdly, the change in the relationship seems to have 
been  triggered  by  the  financial  crisis,  since  it 
occurred  quite  abruptly  at  a  point  in  time  coinciding 
with the peak of the financial crisis.3 While a number 
of  factors  could  potentially  impact  on  how  decisively 
firms  react  to  a  perceived  affluence  of  inventories 
(e.g.  rising  input  prices,  making  excessive  stocks 
particularly  damaging,  or  a  shortage  of  warehouse 
space),  they  are  unlikely  to  have  been  affected  by 
the  financial  crisis  to  the  same  degree  as  another 
relevant factor, namely demand, which plummeted in 
a matter of a few quarters.  

Graph 3.2: Recursive estimates: All sectors 

Source: European Commission. 

This  suggests  that  the  observed  shift 
in  the 
relationship  between  stocks  and  production,  which 
essentially  constitutes  a  move  towards  a  more 

3 Note that, during the financial crisis, the lowest q-o-q growth 
rates of industrial production in manufacturing have been 
registered in 2008q4 and 2009q1. 

- 9 - 

 
 
  
 
 
                                                           
European Business Cycle Indicator  

1st quarter 2015                                                         

cautious  way  of  managing  production,  has  been 
caused  by  the  experience  of  dramatically  dropping 
levels of demand.  

Table 3.2:  Regression 
2014q4): MIGS 

results 

(1990q2 

to 

Finally, the most striking result is that the coefficient 
remains  stable  from  2010q1  onwards  and  does  not 
increase to pre-crisis levels any more. Given that the 
financial crisis of 2008/09, as well as the peak of the 
sovereign debt crisis, which is usually associated with 
the year 2012, date back several quarters, this result 
underlines that the financial crisis is still taking its toll 
on  enterprises.  Amid  elevated  uncertainty  levels, 
firms  seem  to  feel  uncomfortable  about  the  idea  of 
discarding  the  cautious  approach  to  production 
management  adopted  in  the  financial  crisis  and 
attitude. 
reverting 
Furthermore,  persistent  deleveraging  needs  caused 
by 
firms' 
dedication  to  lowering  stocks,  in  case  the  latter 
depend on external funding.   

financial  crisis  might 

risk-taking 

a  more 

reinforce 

the 

to 

In  the  light  of  these  findings,  the  analysis  can  be 
rounded  off  by  re-running  the  regression  on  two 
different  samples,  one  covering  the  pre-crisis  period 
(1990q2  to  2007q4)  and  another  one  the  period 
thereafter  (2008q1  to  2014q4).  The  focus  is  hereby 
on  the  development  of  the  adjusted  R-squared.  As 
shown  in  columns  "ALL-pre"  and  "ALL-post" of  Table 
3.1,  the  goodness  of  fit  statistic  indeed  almost 
doubles  from  about  0.30  to  0.50.  This  result  is 
plausible, suggesting that entrepreneurs are not only 
more reactive to changes in the affluence or scarcity 
of  stocks,  but  that  the  practice  of  frequently,  and 
drastically,  adapting  their  production  in  response  to 
such  changes  has  a  higher  influence  on  aggregate 
output than before.  

Results at MIG-level 

The  next  step  focusses  on  whether,  and  to  which 
degree,  the  conclusions  reached  so  far  also  hold  at 
the level of main industrial groupings (i.e. production 
of  consumption  -  CONS,  intermediate  -  INTM,  and 
capital  goods  -  INVE).  In  this  context, 
is 
particularly  interesting  to  see  whether  the  timing  of 
the  change  in  the  relationship  between  inventories 
and production differs between the sectors.  

it 

Table  3.2  reports  the  results  of  regressing  the 
assessment  of  changes  in  production  on  changes  of 
the  appraisal of  inventories.  It  turns  out  that,  in  the 
case  of  all  sectors,  there  is  a  statistically  significant, 
negative relationship between the two variables. The 
magnitude  of  the  coefficients  is  rather  similar  and 
thus  does  not  provide  evidence  that  the  reaction  of 
entrepreneurs  to  a  given level  of  stocks  would  differ 
much, depending on the sector looked at.  

CONS 

INTM 

INVE 

-0.140 

-0.079 

-0.101 

(0.346) 

(0.659) 

(0.671) 

-1.215 

-1.443 

-1.336 

(0.262) 

(0.194) 

(0.248) 

c1 

c2 

LM(5) 

[0.278] 

[0.103] 

[0.027] 

JB 

F 

[0.790] 

[0.000] 

[0.081] 

[0.000] 

[0.000] 

[0.000] 

SE Regr. 

3.414 

6.767 

7.114 

Adj. Rsq 

0.202 

0.322 

0.243 

Source: European Commission. 

In accordance with the previous section on aggregate 
developments, the sector-specific regressions are re-
run  on  an  incrementally  growing  sample period.  The 
evolution of the coefficient expressing the association 
between  inventories  and  production  is  plotted  in 
Graph 3.3.  

the 

focusses  on 

All  three  sectors  register  an  intensification  of  the 
negative  relation  in  the  period  of  the  2008/09 
financial  crisis.  Thus,  a  first  conclusion  is  that  the 
observation  of  a  change  in  the  relationship  between 
inventories  and  production  at  aggregate  level  is  the 
result  of  similar  changes  at  the  level  of  MIGs.  A 
relative 
second  observation 
magnitude  of  the  drop.  For  each  sector,  we 
determine the average size of the coefficient prior to 
the drop and after the drop, i.e. when the line graph 
in  Figure  3  turns  horizontal  again,  and  calculate  the 
percentage  change.4  The  most  drastic  change  is 
observed  in  the  investment  and  consumer  goods 
sectors, where the coefficient drops, respectively, by 
36%  and  35%.  The  intermediate  goods  sector 
witnessed  a  comparatively  smaller  change  of  about 
25%.  Finally,  focussing  on  the  speed  with  which 
enterprises  in  different  sectors  have  reacted  to  the 
financial  crisis,  it  clearly  emerges  that  the  response 
from  the  investment  goods  sector  was  the  fastest 
and  most  articulated  one.  Within  two  quarters 
(2008q3  and  q4),  the  coefficient  shed  some  30%. 
This  contrasts  especially  with  the  consumer  goods 
sector, which adapted to the new environment  more 
gradually  over  time.  Taken  together,  the  last  two 
observations suggest that the developments at euro-
area 
from  a  quick  and 
sweeping change in  the  behaviour of  the  investment 
goods  sector.  This  is  in  line  with  economic  theory, 
which  suggests  that  investment  goods  work  as  a 

level  result  especially 

4 Depending on the sector looked at, the drop starts in 2008q2, 

2008q3 or 2008q4 and ends in 2010q1 or 2010q2.  

- 10 - 

 
 
 
  
 
                                                           
European Business Cycle Indicator  

1st quarter 2015                                                         

Conclusions 

The  analysis  has  shown  that  the  dynamics  of 
production  are  strongly  affected  by  the  affluence  or 
scarcity of stocks in relation to  demand. When  firms 
declare  stocks  as  being  "too  large",  they  react  by 
cutting  production  in  the  following  months.  The 
opposite holds true when inventories are reported to 
be  "too  small".  As  evidenced  by  the  results  of 
recursive  regressions  this  negative  relationship  has 
intensified  significantly  since  the  onset  of  the  global 
crisis. Interestingly, in the last two years, which have 
seen the economy moving back to calmer waters, the 
relationship  has  not  been  reverted  to  the  pre-crisis 
regime.  The  above  conclusions  are  confirmed  when 
conducting  the  analysis  at  MIG  level  and  especially 
for  the  investment  goods  sector.  All  in  all,  these 
findings  suggest  that  firms  have  become  more 
sensitive  to  mismatches  between  inventories  and 
expected  demand,  reacting  to  affluent  stocks  with 
decisive reductions in production.  

pacemaker  of 
the  business  cycle,  anticipating 
developments  which  later  on  find  repercussion  in 
other main industrial groupings. 

Graph 3.3: Recursive estimates: MIGS 

A. Consumption Goods 

B. Intermediate Goods 

C. Investment Goods 

Source: European Commission. 

- 11 - 

 
 
 
 
 
 
European Business Cycle Indicator  

1st quarter 2015                                                         

Annex 1: The Economic Climate Tracer  
The graphs below show the economic climate tracer for the EU (including sectoral components), the euro area 
and the seven largest EU Member States.  
The series levels are plotted against their first differences (m-o-m changes), so that each chart depicts — at the 
same  time  —  the  current  stance  of  the  sector/country  and  its  most  recent  dynamics.  Series  are  smoothed  to 
eliminate short-term fluctuations. 
The four quadrants of the graphs enable to distinguish four phases of the business cycle: "expansion" (top right 
quadrant), "downswing" (top left), "contraction" (bottom left), and "upswing" (bottom right).  
Cyclical peaks are positioned in the top centre of the graph, and troughs in the bottom centre. 
In order to make the graphs more readable, two colours have been used for the tracer. The darker line shows 
developments in the current cycle, which in the EU and euro area roughly started in January 2008. 

Economic climate tracer across sectors, EU 

- 12 - 

 
 
 
 
 
 
 
 
European Business Cycle Indicator  

1st quarter 2015                                                         

Economic climate, largest EU Member States 

- 13 - 

 
 
 
 
 
 
 
 
 
European Business Cycle Indicator  

1st quarter 2015                                                         

Annex 2: Reference series  

The reference series are from Eurostat, via Ecowin: 

Confidence 

Reference series (volume/year-on-year growth rates) 

indicators 

Total economy (ESI) 

GDP, seasonally- and calendar-adjusted 

Industry 

Services 

Industrial production, working day-adjusted 

Gross value added for the private services sector, seasonally- and calendar-adjusted 

Consumption 

Household and NPISH final consumption expenditure, seasonally- and calendar-adjusted 

Retail 

Building 

Household and NPISH final consumption expenditure, seasonally- and calendar-adjusted 

Production index for building and civil engineering, trend-cycle component 

Economic Sentiment Indicator 
The  economic  sentiment  indicator  (ESI)  is  a 
weighted  average  of  the  balances  of  replies  to 
selected  questions  addressed  to  firms  and 
consumers  in  five  sectors  covered  by  the  EU 
Business  and  Consumer  Surveys  Programme. 
The  sectors  covered  are 
industry  (weight 
40 %),  services  (30 %),  consumers  (20 %), 
retail (5 %) and construction (5 %).  
Balances  are  constructed  as  the  difference 
between the percentages of  respondents giving 
positive  and  negative  replies.  The  Commission 
calculates  EU  and  euro-area  aggregates  on  the 
basis  of  the  national  results  and  it  seasonally 
adjusts  the  balance  series.  The  indicator  is 
scaled to  have  a  long-term  mean  of  100  and  a 
standard  deviation  of  10.  Thus,  values  greater 
than  100  indicate  above-average  economic 
sentiment and vice versa. Further details on the 
construction of the ESI can be found at: 
Methodological  guides  -  Surveys  –  DG ECFIN 
website   
Long  time  series  of  the  ESI  and  confidence 
indicators are available at: 
Survey database – DG ECFIN website  

Economic Climate Tracer 
The  economic  climate  tracer  is  a  two-stage 
procedure.  The  first  stage  consists  of  building 
economic  climate  indicators.  These  are  based 
on  principal  component  (PC)  analyses  of 
surveys 
balance 
conducted  in  industry,  services,  building,  the 
retail trade and among  consumers.  In  the  case 
of industry, five of the monthly questions in the 
industry  survey  are  used  as  input  variables 
(employment and selling-price expectations are 
excluded). For  the other sectors the number of 

series 

(s.a.) 

from 

the 

(ESI), 

indicator 

sentiment 

input  series  is  as  follows:  services:  all  five 
monthly  questions;  consumers:  nine  questions 
(price-related questions and the question about 
the  current  financial  situation  are  excluded); 
retail:  all  five  monthly  questions;  building:  all 
four  monthly  questions.  The  economic  climate 
indicator (ECI) is a weighted average of the five 
PC-based  sector  climate  indicators.  The  sector 
weights  are  equal  to  those  underlying  the 
economic 
i.e. 
industry  40 %;  services  30 %;  consumers 
20 %;  construction  5 %;  and  retail  trade  5 %. 
The  weights were  allocated on  the  basis of two 
broad  criteria:  the  representativeness  of  the 
sector 
tracking 
in  question  and  historical 
performance in relation to GDP growth.  
In  the  second  stage  of  the  procedure,  all 
climate  indicators  are  smoothed  using  the  HP 
filter 
short-term 
fluctuations of a period of less than 18 months. 
The smoothed series are then standardised to a 
common mean of zero and a standard deviation 
of  one.  The  resulting  series  are  plotted  against 
their first differences. The four quadrants of the 
graph, corresponding to the four business cycle 
phases,  are  crossed 
in  an  anti-clockwise 
movement.  The  phases  can  be  described  as: 
above  average  and 
increasing  (top  right, 
‘expansion’), above average but decreasing (top 
left, 
and 
‘downswing’), 
decreasing  (bottom 
‘contraction’)  and 
below  average  but  increasing  (bottom  right, 
‘upswing’).  Cyclical  peaks  are  positioned  in  the 
top  centre  of  the  graph  and  troughs  in  the 
bottom centre. 

to  eliminate 

in  order 

average 

below 

left, 

- 14 -