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Early Warning System for Recession
August 24, 2012 17:24


The Russian government is working on an early warning system against possible financial collapses. By autumn, the Ministry of Economic Development is going to roll out a risk monitoring system set to detect possible crisis developments and a package of rapid response steps.

Deputy Minister of Economic Development, Andrey Klepach, said the new system will rely on the so called ‘leading indicators’.

Concept

Identified by Wesley C. Mitchell and Arthur F. Burns in 1938, leading indicators have been studied and elaborated extensively as a key tool to predict recession. The list of top ten indicators usually includes, but is not limited to:

  1. Average weekly hours, manufacturing.
  2. Average weekly initial claims for unemployment insurance.
  3. Manufacturers’ new orders, consumer goods, and materials.
  4. Vendor performance, slower deliveries diffusion index.
  5. Manufacturers’ new orders, nondefense capital goods.
  6. Building permits, new private housing units.
  7. Stock prices, 500 common stocks.
  8. Money supply, M2.
  9. Interest rate spread, 10-year Treasury bonds less federal funds.
  10. Index of consumer expectations.

Custom-made

The Russian Ministry of Economic Development has been using a number of leading indicators for some time now, including the Purchasing Manag­ers’ Index (PMI), OECD statistics, forecasts provided by the Gaidar Institute, data on railway transportation volumes and power consumption figures.

“We conduct regular monitoring of these indicators at the moment. If there is a turning point, say, a drastic drop in oil prices, extremely high figures of capital flight, if the rouble or the stock exchange shrinking, we track down how these changes impact production and economy in general,” says Oleg Zasov, head of the ministry’s macroeconomic forecast department. He claims that by autumn the government will piece different indicators together to produce a comprehensive early warning tool. “We may re-arrange some of the existing indicators or invent our own,” he said.

The final list should include real-time indicators that are vital for the Russian economy, like oil prices, stock exchange figures, exchange market pressure (EMP), as well as weekly statistics – the industrial output index, trade surplus, budget balance and state bonds prices.

Doubts

Some experts have been pessimistic, however. They admit that leading indicators proved accurate, though not helpful in averting the 2008 crisis, but point to the fact that the new recession will most probably have a different nature. “The ministry needs new indicators, not the ones that were effective before,” says Sergey Tsukhlo, from the Gaidar Institute in Russia.

You can read a report on the effectiveness of leading indicators by Russia’s Higher School of Economics in English here.

 

 

 




Author: Mikhail Vesely

Tags: Russian economy leading indicators Russian Ministry of Economic Development stock markets Higher School of Economics 

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