Constructing a Composite Leading Indicator of Economic Activity in Greece

Abstract

Given the significance of being able to obtain early insights into the path of total economic activity, the extraction and use of information out of indicators exhibiting leading properties becomes particularly important. In this article, we construct a composite leading indicator of Greek economic activity using selected individual indicators featuring leading properties, including business expectation indices. We apply a dynamic factor model and investigate the growth forecasting ability of the derived leading indicator within a bivariate VAR specification. We use data covering the January 2000-December 2013 period, and hence, take into account the economic recession the Greek economy is still undergoing. The evidence supports the use of both hard and soft indicators for the construction of the composite leading indicator. The latter appears to possess satisfactory leading properties with regard to forecasting growth, as indicated by in-sample and out-of-sample analysis.