INDICATORS OF CONFIDENCE

From time to time the central banks of a number of the world's leading countries carry out monitoring in order to assess the economic performance of enterprises and organizations operating in the country's real sector, and their future expectations.

Following this practice, the Central Bank of Azerbaijan began building a system of monitoring the real sector in 2008. It now extends to over 350 enterprises and organizations operating in the sphere of trade and services, the processing industry and the construction sector, totalling 60,000 workers.

The indices compiled on the basis of the information received are sent out in the form of an analytical review to the organizations taking part in the monitoring which have the opportunity to take a decision on investments, the production process and borrowing.

In addition to this, the indices are also of great interest to the participants at stock exchanges and potential investors. But most importantly, these indices are an information resource for taking decisions in the sphere of monetary policy.

Business Confidence

For the purpose of its polls the Central Bank compiles various indices - a diffusion index, an index of inflation expectations, an economic sentiment index, a construction industry confidence index, a retail trade confidence index and a business climate index.

The Central Bank notes an improvement last year in the business confidence index (BCI). According to the CBA's estimates, while a stable level of supplies of production were maintained, the positive trends in expectations and rates of growth of industrial production were factors of an increase in the BCI.

According to the CBA's figures, the business confidence index in industry for 2013 was 11.4 per cent, an increase of 2.6 of a percentage point compared with 2012. The BCI in trade in Azerbaijan last year was reduced insignificantly (by 0.1 of a percentage point) compared with 2012, totalling 7 per cent.

The monitoring showed that the trend of a growth in economic development was governed by an increase in activity in the sphere of trade in durable goods. Thus, expectations and sales in trade had a tendency towards growth. Optimistic forecasts mainly applied to trade in furniture and domestic electrical appliances. On the whole the results of monitoring of the real sector show a steady increase in the number of enterprises showing an increase in production and turnover, the CBA notes.

Over the course of last year there was evidence of growth in all spheres of the non-oil sector and, specifically, the biggest growth was recorded in the construction sphere, the housing organization sphere, public catering, communications and trade. Almost half the growth (10 per cent) in the non-oil economy, or 4.8 of a percentage point, was due to the construction sector. Discounting the oil component, growth in industry was ensured by means of the food, engineering and furniture industries and the production of building materials and leather. High rates of growth in agriculture were evident both in the production of vegetable-growing output and in stockbreeding. In the services sphere, the highest growth was achieved in public catering and the trade sector.

The BCI is compiled based on company polls in various spheres of the economy. The method of calculating the BCI reflects the business climate in the country.

The Central Bank is of the opinion that the BCI is not an appropriate indicator for assessing growth but it has proved satisfactory in determining the turning point of the economic cycle.

This is the most precise indicator available in determining the current state of the industrial sector because the index includes information about orders, output, employment, material and production stocks and export-import prices. Thanks to the BCI, one can forecast the volumes of orders of enterprises and production in industry, employment levels and the producer price index. BCIs are also used in calculating other leading indicators for the economy. In short, an analysis of an indicator such as the BCI index is a necessary condition in forecasting economic trends, and that is why the CBA plans to carry out similar monitoring in the future.

Consumer confidence on the increase

A recent index compiled by the CBA was the consumer confidence index (CCI) which was drawn up on the basis of a poll of 4,250 private households, which is a representative level by international standards. The CCI showed that private households give a high rating to the country's economic prospects in the next 12 months. Their mid-term expectations are also optimistic and consumers are positive in their mood.

The poll was carried out based on a method approved by the European Commission, as well as an instruction applied by the Organization of Economic Cooperation and Development (OECD). Aid in conducting the poll was provided by the Swiss State Secretariat for Economic Affairs (SECO) and the KOF Institute.

The CBA pointed out that the CCI data was based on the financial situation of consumers, the general economic situation in the country and the expected indicators for unemployment and tax dues.

Generally speaking last year saw increased consumer activity, which was the result of an increase in monthly wages, the number of people employed in the economy and the volume of consumer credit.

Clearly, the consumer confidence index is, in fact, the only macroeconomic indicator which takes in the opinions, assessments and expectations of the country's population, which in the long term plays a decisive part in the dynamics of domestic demand and, accordingly, an acceleration or deceleration in economic growth. Taking into account the importance of this index in forecasting the dynamics of economic growth, an assessment of this indicator is carried out in most countries of the world by both government and private organizations. In addition, there are a number of independent research organizations that conduct research both independently and also by order into consumer moods in various countries.

Different factors are taken for different countries when analyzing a change in the consumer confidence index and especially when compiling it. When assessing CCI in Russia all the components of the federation are researched, whereas in India, for example, this is carried out only in the six largest cities. In accordance with official economic-geographical and demographic data the territory of the USA is divided into nine regions when assessing this index. In the US an assessment of consumer expectations has been carried out since 1923 and is effectively used in forecasting trends in the sphere of employment and the general state of the economy as a leading indicator of the business cycle. The basis of all these methods is a poll of respondents (by post, telephone, the Internet or direct contact with the respondent).

The CCI is in many ways, without doubt, a subjective indicator. It is influenced not only by specific changes in the state's economy, but also by many political factors, as well as the media. But, on the other hand, the results of polls reflect objective reality as well. In them one can detect public intuition which enables people to sense the ups and downs in the economy and their personal well-being.

As has already been noted, these indices are broadly applied in a number of the world's developed countries to determine the directions of economic development. And the preparation of such indices by the CBA shows that world advanced experience is being introduced in Azerbaijan.