CBS switches to new way of measuring business confidence

COEN is a monthly survey commissioned by the European Commission that surveys the Dutch Mapping the moods of entrepreneurs. In the first month of each quarter, more industries are surveyed and the survey itself becomes more comprehensive and provides more detailed information. Statistics Netherlands (CBS), the Chamber of Commerce and Industry, the Economic Institute for Construction and Housing (EIB), the Dutch Employers' Organization (VNO-NCW) and the Netherlands Organization for Small and Medium Enterprises (MKB-Netherlands).

Business confidence is measured quarterly using COEN results based on several balances. These balances are calculated by subtracting the proportion of entrepreneurs who reported negative experiences and expectations from the proportion of entrepreneurs who reported positive experiences and expectations. The balances are then adjusted for seasonal effects and averaged without weighting to create a business confidence index for each sector of the industry.

Old method: correlated with GDP, but limited comparability

Older methods focused on the correlation between business confidence and GDP. Partly for this reason, the questions used to calculate business confidence varied by industry. When the old method was developed, the questions used in each sector of the industry were selected to ensure correlation with the development of GVA. This meant that manufacturing and construction used different questions, and there was a gap between the industrial sector as a whole and services. In addition, the business confidence balances for some industries were revised to bring the series mean to zero, but not for others. As a result, business confidence indicators by industry could only be compared to a limited extent, making it difficult to interpret business confidence indicators for the non-financial private sector as a whole.

A new method: consistent and comparable sentiment indicators

Consistency and comparability are important when it comes to the usefulness of corporate confidence numbers. In the new methodology, the same two questions that are thematically consistent with the updated definition of sentiment indicators are used across all sectors of the industry. As with the old method, a balance is calculated for each question, but the questions are not based on correlation with GDP. The Business Confidence Index currently serves primarily as a sentiment indicator for the non-financial private sector in the Netherlands. There is still a correlation between the historical series and GDP, but this is less clear than in the old method.

The two questions selected concern developments in the economic environment over the past three months and respondents' expectations for the next three months, with the balance adjusted to account for seasonal effects only. This makes business confidence figures for different sectors of the industry highly comparable and easily categorized by region and company size. Based on the figures for each sector, a consistent figure for the entire non-financial private sector can be calculated using a weighted average based on the number of employees.

The new methodology not only makes business confidence numbers more consistent and comparable, but also allows CBS to publish more numbers. From now on, the Business Confidence Index will also be calculated for three additional industries: Agriculture, Forestry and Fisheries (SBI A), Culture, Sports and Recreation (SBI R), and Other Services (SBI S). In addition, his two selected questions are surveyed monthly across most industries to provide monthly business confidence figures. With the introduction of the new methodology, the Manufacturing Confidence Index is no longer the same as the Producer Confidence Index. These figures are calculated based on the European definition of producer confidence, especially in the manufacturing sector, and can be compared between different European countries. Producer confidence results will continue to be available in existing StatLine tables.

Effect of new method

The figure below shows the business confidence index for the private non-financial sector as a whole, broken down by old and new methods. Both series generally follow the same trend. However, the series based on the new method shows a steeper decline between mid-2018 and the beginning of the coronavirus crisis. The biggest difference between the two series will be seen in 2022. The new index shows a continued decline, while the old index rose in the second quarter of this year. This is due to a decline in respondents' sentiment regarding future economic conditions. This is an indicator in the new method, but not in the old method. In the old method, expected sales played a big role. These rose sharply in his second quarter of 2022. The differences between the two indexes are due to both methodological differences and the addition of his three industries in the new method. However, because these additional industries are relatively small, their impact on the overall numbers is limited.