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Economic Letter: “Measuring Economic Activity in Real Time during COVID-19”


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Economic Letter

  • New Economic Letter updates the Central Bank’s Business Cycle Indicator (BCI), a monthly summary indicator of economic conditions in Ireland.
  • Decline in the BCI in April suggests that the initial economic impact of COVID-19 was both sharper and deeper than the financial crisis of 2008/09.
  • A second Economic Letter is also published today and looks at consumer perceptions of inflation in the euro area

The Central Bank has published two Economic Letters, which examine the topics of the impact of COVID-19 on the Irish economy and consumer perceptions of inflation in the Euro area.

The first Economic Letter, written by Central Bank economists Thomas Conefrey and Graeme Walsh and entitled “Measuring Economic Activity in Real Time during COVID-19”, updates the Central Bank’s Business Cycle Indicator (BCI), which is a monthly summary indicator of overall economic conditions in Ireland estimated from a larger dataset of high-frequency releases.

The economic and financial indicators which feed into the BCI include hard data such as the unemployment rate, retail sales, industrial production, tax receipts and share indices, as well as soft data such as consumer sentiment and purchasing managers indices. It also takes into consideration information such as exchange rates, interest rates, equity prices and consumer prices.

The BCI provides a timely measure of economic activity in advance of the release of official quarterly data.

The key findings of this paper are:

  • The BCI dropped to an unprecedented low at the peak of the containment measures in April.
  • The decline in the indicator in April suggests that the initial economic impact of the COVID-19 pandemic was both sharper and deeper than the financial crisis of 2008/09. The main drivers behind this reduction in activity were the unprecedented deterioration in the labour market, the decline in consumption and the downturn in trading activity amongst firms.
  • The latest preliminary estimate of the BCI for May 2020 suggests some stabilisation in economic activity following the sharp falls observed in March and April. The overall level of activity remains substantially below that observed prior to the COVID-19 outbreak.

As new data become available, the indicator will be updated regularly to inform assessments of the current state of the economy as the planned easing of the COVID-19 restrictions progresses.

In the second Economic Letter, Central Bank economist Zivile Zekaite notes that survey data shows consumers tend to think that inflation is higher than it actually is. Inflation perceptions by consumers may influence economic and financial decisions of households. The paper examines which goods and services are driving inflation perceptions of consumers in the euro area.

The key findings of this paper are:

  • Consumers appear to have a different basket of goods and services in mind from that used in the Harmonised Index of Consumer Prices (HICP) when forming their views on consumer price developments. Some goods and services are likely being disregarded.
  • Inflation perceptions are driven by price developments in a number of HICP items covering a relatively broad range of goods and services. For some price indices, however, the relative importance in determining perceived inflation differs from the relative weight in the HICP. In addition, residential property prices are also important in explaining perceived inflation.
  • It appears that consumers may find it difficult to adjust observed prices for changes in quality, which may explain at least some of the gap between HICP and consumers’ perceptions.


• Central Bank Library of Economic Letters

• The views expressed in economic letters are those of the authors and do not necessarily represent the views of the Central Bank of Ireland.

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