By Peter Lundgreen,
The Covid-19 crisis is also hurting the German economy with a sharp drop in the GDP growth, though the Bundesbank’s WAI-index signals light at the end of the tunnel, which will please many investors.
In mid-May, the German central bank Bundesbank introduced a new index to measure economic activity. Interestingly, the initiative behind the new index is a reaction to the Covid-19 crisis. The central bank needed a faster insight on the development of the economy compared to what typical economic indicators offer and are normally delayed of up to a couple of months.
The financial market is currently exploring the largest decline in the GDP growth that modern Germany has ever experienced. One can safely say that the new WAI-index (Wöchentlicher Aktivitätsindex, or “weekly activity index”) was tested under extreme conditions, as it is the first time that the German GDP growth is published with the WAI-index also available. The good news is that the WAI-index is pointing up towards positive territory, which is equal to positive GDP growth.
Since the index has only been published over the past few months, I have no experience with the it yet, including the reliability of the predictions. I do pay particular attention to one thing, which is the steepness of the recovery after the negative growth trend hit the bottom.
An index can precisely predict the economic activity under normal circumstances, as we all live a significantly more routine-like life than we might think. The Covid-19 crisis is in itself chaotic, but the reopening of an economy will especially contain a range of chaotic elements.
In that context, I am very excited about whether the WAI-index captures the development correctly, where the steep recovery is of particular interest, as mentioned. If one looks at the weekly data for the WAI-index, the steep turnaround began just in the last week of June and is up until now- if this continues, it will be really good news for the stock market, so it might be worth visiting the Bundesbank’s website every Monday to get latest index numbers.
As mentioned, the index is newly developed, therefore, many investors will consider whether the data input to the model replicates reality satisfactorily. I will therefore allow myself to repeat a brief description of the elements included in the model, even though I reviewed them in May. The first component is “realized power consumption” and the second component is the revenue from the highway toll that freight forwarders pay for their trucks to drive on the German highways. These two components are the two indicators used in the WAI model to predict changes in production. The highway toll is also an indicator of developments in retail sales. Developments in the labour market are predicted via Google searches on “unemployment” and “reduced work hours”.
To describe the global economic activity, the model uses one single piece of data, namely the total number of flights worldwide, consisting of departures for both passenger and cargo aircraft.
Changes in mobility are calculated on the basis of data from the many stationary measuring stations for air and particle pollution in large German cities. The seventh, and final, component is how much cash is withdrawn in German cash dispensers.
In any forecast model, some errors can be difficult to adjust, which could concern the WAI model. Some examples are if employees are fired or are reduced in working hours, then the power consumption at the workplace decreases, but the power consumption in households increases, though the increase among the households does not represent a production, unless one works from home.
As with air traffic, during the lockdowns, large regional differences can arise in flight activity. For example, the air traffic in Europe was very limited during a period when there was quite busy air traffic in other parts of the world. How much and how little it affects the model, I have no idea about, but in my opinion, it does not make the model less exciting to follow.
However, no one has promised investors that life in the financial market should be easy and simple. Just as expectations to the economy is on the rise, the number of Covid-19 infections increase again, and should the increase continue, it will have a negative effect on economic growth again.
In Germany, I note that the number of infected people seems to grow because more people are being tested for Covid-19. Relatively speaking, it still remains that 0.60 pct. of those tested turn out positive. But there is no doubt that at present, it is a fine balance whether the infections will explode again or whether the WAI-index can continue to point upwards.
Peter Lundgreen is the Founding CEO of Lundgreen’s Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment & finance. Peter is an international columnist and speaker on topics about the global financial markets.