In a previous post I highlighted a small example of how the Onalytica Recession-Index gave a good indication of an impending recession in the UK.
However, I haven’t had the opportunity to conduct a more thorough analysis so I recently asked my colleague, Dr. Andreea Moldovan, to have a look at the Onalytica Recession-Index in relation to GDP. Her findings impressed me.
Figure 1 (below) shows the UK GDP against Recession-Index for UK Economy. The values for GDP are given in quarterly percentage (or relative) change on previous quarter.
The Recession-Index is a 1 month leading indicator as it can be seen on the chart.
The series have different scales and are represented on different vertical axes, for ease of chart interpretation. The left vertical axis corresponds to the Recession-Index values, while the right axis is for the GDP.
Since Q1 2010 and except for Q4 2010, the Recession-Index correctly predicts the UK GDP direction of growth (increase or decrease) 1 month ahead. On the chart this is reflected by the series having opposite directions: decrease in Recession perception by the population corresponds to a growth in GDP and vice versa. So, in 8 out of 9 situations analysed the prediction is correct.