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What drives business expectations? A tale of demand and supply

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  • Battistini, Niccolò
  • Neves, Pedro

Abstract

This paper develops a novel empirical framework to analyse the drivers of business expectations in the euro area. Using harmonised data from the European Commission’s business surveys for manufacturing, services, and construction, we build composite business expectations indices (BEI) for activity and prices. These composite BEI exhibit strong predictive power for near-term real GDP growth and GDP deflator inflation. To identify the underlying forces shaping expectations, we estimate sector-specific structural Bayesian vector autoregression models, combining responses on expectations and reported limits to production. According to the results, demand-side shocks, notably product demand and financial conditions, account for the bulk of fluctuations in business expectations, with heterogeneous effects across sectors. Supply-side shocks, notably materials supply and labour conditions, play a significant role in driving price expectations, especially during the post-pandemic inflationary period. Our results demonstrate the value of a granular survey-based modelling approach for real-time economic analysis and policy assessment. JEL Classification: C11, E10, E60

Suggested Citation

  • Battistini, Niccolò & Neves, Pedro, 2026. "What drives business expectations? A tale of demand and supply," Working Paper Series 3179, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20263179
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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