New German forecaster more optimistic
ON May 18, the German central bank, Bundesbank, presented a new index that may become the new darling of financial markets. The first signal provided by the WAI (Weekly Activity Index) is encouraging and could be another reason to become acquainted with it amid the coronavirus disease 2019 (Covid-19) pandemic.
The WAI includes seven components that can be measured 24 hours a day, seven days a week. In addition, the data used as input is largely available in real time, which is one of the very exciting elements of the WAI. The basic requirement for the seven components is that they represent a strong importance for economic activity. The components must describe different activities in the economy to avoid a double accounting effect on the index.
The first component, which the German central bank calls “realized electricity consumption,” where corrections have been made for the transport of electricity and for the electricity companies’ own electric consumption. The second is the toll that the truck companies pay for having their trucks driving on the highways. The electricity consumption and the toll are the two indicators used in the WAI model to predict changes in production. The toll is also the sole indicator for developments in trading or commerce. To predict the development of the labor market, the central bank includes data from Google by measuring the use of two keywords. One word is simply “unemployment” and the other is “shortened workdays,” which corporations can introduce during an economic crisis.
To describe global economic activity, the model just uses one single piece of data: the total number of flights worldwide, including passenger and cargo flights. Again, it is a very straightforward approach to data today as the WAI retrieves flight data from the same source that many others also visit — flightradar24.com.
Over the past decade, new data has, of course, emerged, which the WAI also uses, in this case to measure on the penultimate component — mobility. There are now so many stationary measurement stations for air and particulate pollution in German cities that the information also makes it possible to measure changes in mobility quite accurately. Again, using data that is publicly available and collected from the European Environment Agency.
The seventh component will confuse readers in China and Nordic countries, because it is something as basic as the change in the circulating amount of banknotes, or more precisely, how much cash is being withdrawn in banks and automated teller machines in Germany.
China and the Nordics are among the countries in the world with the highest online shopping frequency and the use of electronic payments is outspoken in general. Germany is far behind in this and, therefore, cash payments continue to be widespread in Germany. And it is here that the central bank finally draws the ace where they make use of its insider knowledge, in this case, about the daily cash activity in the German banking system.
My expectation is that many in the financial markets will look at the WAI, which is why the index will be important in the financial markets, or at least until it proves how accurate its predictions are. The first index number that has been published is the figure for May 12, which is -4.6. The index has been somewhat down during April, according to the Bundesbank, which is why it assesses the current trend to be on the positive side.
But it is a rough world that the WAI encounters from Day 1 — and in my own assessment of the German economy — even fewer components are being included. They are not as early predictors as the WAI’s data, but I look at how consumers are doing, which includes consumer confidence, as well as actual retail sales, where my expectation is a cautious behavior among consumers. In addition, I continue to give car production and the whole automotive sector in Germany a special weight when assessing the outlook. In April, the total number of newly registered passenger cars in the European Union dropped by 76 percent compared to a year earlier. This is, of course, due to the Covid-19 crisis, but the whole sector has been under severe pressure for years now, and the recent drop just highlights the huge challenges that the sector continues to face. A few weeks ago, the German car industry tried to find some support from the German government, but there was no help to get. One should not underestimate how important the automotive sector is to the German economy, and it might be a risk that the WAI will not capture this quite precisely in its data input.