Economic Insights
New Indicators for Abnormal Times
New Indicators for Abnormal Times<br/>非常時期的新指標

Economic indicators are vital factors that governments consider when making policy and financial decisions. As the world economy has developed, such indicators have continued to evolve, generating new data sets. 

For instance, in the 1930s, the health of the U.S. economy was measured by freight car loadings and industrial production. Later, gross national income was used as the primary measure of aggregate economic activity, and was replaced by gross domestic product, or GDP, in 1991. 

In modern times, indicators such as GDP, unemployment rate and consumer price index are widely used to portray the health of an economy, and they are closely monitored by investors and market watchers. When things are “normal,” they can provide individuals, businesses and policymakers with a good basis for decision making.  

Most of us may agree that the coronavirus has brought a new normal. The Covid-19 pandemic is not only a health crisis, but also an economic one. Global lockdowns have resulted in economic fallouts on an unprecedented scale within a relatively short period of time. Disruptions to daily economic activities as well as supply chains have exposed the shortcomings of traditional economic indicators in providing a timely reflection of economic performance. Traditional indicators may therefore not be able to assist investors in making timely and accurate decisions on whether to buy or sell assets. 

The nature of this crisis presents a big challenge to policymakers. In February and March of this year, when many economies were hit by the first wave of infections, there were strong arguments that timely actions needed to be taken by governments to support the economy. 

However, to draw up an emergency plan to save jobs and the economy, governments had to first gain a comprehensive understanding of the crisis. Figuring out the actual economic impact and identifying the right medicine quickly were essential in fighting the coronavirus recession. 

This was easier said than done. A false assessment would have serious consequences – doing too little could lead to massive bankruptcies and layoffs, and a slower recovery. Conversely, overreacting could make public finances unsustainable and create heavy burdens for future generations to pay back. 

In such an unprecedented situation, traditional economic data alone was not sufficient to help investors and policymakers obtain clear assessments of economic health, for a number of reasons. 

Firstly, traditional economic indicators are, in general, not collected and published frequently and timely enough to catch such a sudden crisis. In Hong Kong, the preliminary estimate of GDP for each quarter is only publicly available one month after the end of that quarter. 

A second shortcoming is the “significant data disruptions” during a pandemic, as described by the International Monetary Fund (IMF). Fewer participants are able or willing to respond to economic surveys conducted by statistics offices. This is particularly the case for places in strict lockdown, where economic impacts need to be gauged most. For instance, the response rate to household surveys in the U.S. – which is used to calculate unemployment rates – fell to 67% in July from over 80% before the pandemic. 

There are also concerns about whether lockdowns and remote working lead to inconsistent sampling. Paul Donovan, Chief Economist at UBS, commented: “If you are filling in survey forms in a lockdown, you are likely to be an unusual person, and possibly not representative.”

Therefore, investors, economists and policymakers have turned to non-traditional economic indicators for reference. In the U.S., initial jobless claims data, a weekly publication, is considered a proxy metric for unemployment. Thanks to technological advances in location and tracking services, high-frequency or real-time data such as restaurant bookings and mobile payments are increasingly being used to monitor levels of social and economic activity. 

Andrew Haldane, Chief Economist of the Bank of England, said the coronavirus had resulted in an “explosion of interest” internationally in developing indicators to track the economy more promptly. 

These non-traditional and innovative indicators have been adopted with an aim of providing prompt and useful signals on economic performance for investors and policymakers over the course of Covid-19. 

It is not entirely clear whether they will be able to facilitate better economic analysis by filling the void where updated traditional indicators are not available, and whether they will be as helpful in measuring economic activity in normal times. Comparison is also difficult to make across economies – increased restaurant bookings in one country compared to another might simply be the result of greater technology adoption.

Periods of crisis are often good opportunities to breed creativity and innovation. The list of major economic indicators has not changed much over the past couple of decades despite rapid technological progress and the emergence of new sectors such as fintech, e-commerce and AI, as well as revolutions in industries such as the media, entertainment and advertising. Whether the coronavirus proves to be a catalyst for the use of real-time indicators remains to be seen. 

For now, the timeliness of these new indicators seem to imply that they are able to indicate turning points, supplementing the traditional measures. The IMF has already incorporated mobility and flight data to analyse the economic impact of Covid-19, and more granular and experimental information with a narrower focus is likely to be published in the future to measure sectoral activities. It is obvious that more work needs to be done to improve their ability to measure the magnitude of economic fluctuations as well as making them more comparable across jurisdictions.

 

Wilson Chong, wilson@chamber.org.hk  

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