Non-technical summary of ESM Working Paper 68: A survey-based measure of asymmetric macroeconomic risk in the euro area

A timely assessment of both the baseline macroeconomic outlook and potential risks are key tasks of many economic policy institutions. Since macroeconomic data are usually published with a significant delay, economic analyses are often complemented by ‘soft’ indicators derived from various surveys. Such survey data are usually available during, or shortly after, the reference period and often strongly correlate with actual ‘hard’ economic data, explaining their popularity in both the public and private sector. Survey-based indicators are regularly used to track the business cycle, but less frequently for risk assessment. 

In this paper, we introduce a new survey-based measure for the euro area that summarises the perceived balance of risks, i.e. the relative importance of downside versus upside risks. We compile a large monthly dataset for the period from 2003 to 2023, measuring the economic sentiment of consumers and sectors such as industry, construction, retail, and services. The data also include information on the assessment of financial market participants and the financial sector. Based on this dataset, our measure of the economy-wide perceived balance of risks is then constructed using a methodology developed in earlier work. 

Our findings show that the perceived balance of risks changes sharply during times of crisis, with perceived risks shifting on average to the downside. Moreover, no single group of variables is the main reason behind these shifts, but different groups matter at different points in time. We illustrate the relevance of our survey-based risk measure with two practical applications. 

First, we show that this new risk factor can help improve forecasts of (downside) risk to actual economic outcomes, namely industrial production and retail sales. Second, using a VAR analysis (a way to study how multiple economic variables influence each other over time), we highlight that changes in the economy-wide perceived balance of risks can have negative implications for the macroeconomy and financial markets. More generally, the risk measure proposed in this paper could benefit timely quantitative (number-based) risk assessments at economic policy institutions to monitor the balance of risks.