CEIZ index for August 2020: Strong annual drop in GDP in the third quarter of 2020

In August 2020, the CEIZ index recorded a drop of 2.7 index points compared to the same month in 2019 and a very mild decrease of 0.03 index points compared to the previous month. Such a development suggests that economic activity, measured in annual change rates, has significantly slowed down in the third quarter of 2020, while the three-month drop in economic activity recorded in the second quarter of 2020 has been stopped. When looking at the index components, volume of industrial production, number of tourist arrivals, and real retail trade recorded a lower value in August compared to the previous month and compared to the previous year.

Based on the CEIZ index movements, we expect the real GDP annual growth rate in the third quarter of 2020, compared to the same period last year, could amount to -13.3 percent*, which is a lower drop rate compared to the second quarter of 2020, when GDP registered a drop of -15.1 percent. Seasonally adjusted data, based on the assessment of the annual GDP growth in the third quarter of 2020, suggest that, compared to the second quarter, GDP could increase by 2.8 percent in the third quarter, which implies that the recession already hit bottom in the second quarter of 2020. Considering that the economy experienced a structural break in the second quarter, which makes the model estimation of the CEIZ index more difficult and less reliable, the annual and quarterly estimates of the GDP drop rate should be taken with caution. A more accurate assessment of the real GDP drop in the third quarter of 2020 will be possible when data for September 2020 become available, but even after those values are included in the estimation, it would be more appropriate to state that a further sharp drop in annual GDP is expected in the third quarter along with a certain degree of recovery on a quarterly basis, without specifying the rate of the drop.

* Monthly assessment of GDP growth rate based on CEIZ index value is indicative and should be used primarily as information on the current condition and trend of the business cycle in Croatia.


What is CEIZ?

Coincident Economic Index of the Institute of Economics, Zagreb (CEIZ) is a monthly composite business cycle indicator developed by the Institute of Economics, Zagreb. Its purpose is to provide timely information on the current business cycle condition. Consequently, the CEIZ index value changes simultaneously with the business cycle, thus indicating the present state of the economy. The CEIZ index was constructed by applying in parallel a dynamic factor model and a Markov switching model. Details on the CEIZ index methodology are described in the paper: Rašić Bakarić, Ivana, Marina Tkalec and Maruška Vizek, 2016, “Constructing a Composite Coincident Indicator for a Post-Transition Country”, Ekonomska istraživanja (Economic Research), 29 (1), pp. 434–445. 

The CEIZ index is useful in three ways. First, it is a single-number business cycle indicator containing information that would otherwise have to be accrued by analyzing a large number of economic series. Second, unlike the GDP series, it provides monthly estimates on the state of the economy, thus providing information on fine changes that took place in a short period of time. Third, the CEIZ index is available one to three months prior to quarterly GDP estimates, meaning that policy-makers and the general public can observe the current state of the economy in a timely manner. 

The index is to be interpreted in such a way that the positive values represent economic growth while the negative ones represent a decreased economic activity.