A ‘New Modesty’? Level Shifts in Survey Data and the Decreasing Trend of ‘Normal’ Growth

While the current level of the Economic Sentiment Indicator, which is well above its long-term average, is compatible with expanding economic activity, it has been associated with lower growth rates than those implied in the pre-recession period. Departing from the idea that the relationship between qualitative survey (‘soft’) and quantitative (‘hard’) data might have changed during the Great Recession due to a 'new modesty' of survey respondents, this paper goes one step further and examines to what extent this link might be constantly moving over longer time periods. Using rolling regressions and time-varying parameter models for the euro area, the paper shows that the growth rates typically implied by given survey results did not only fall during the Great recession, but already decreased rather systematically for close to 20 years before the crisis, i.e. since around 1990. This is true for the overall economy (measured by GDP growth), but also industrial production, construction production, and households consumption. Country-specific results for the GDP of the four largest euro-area economies are also presented. Furthermore, the paper suggests that business and consumer survey results can be used, beyond their usual short-term forecasting purposes, to gauge changes in long-term or potential growth. While the results should be interpreted as preliminary and experimental, they might be useful as a contribution to the assessment of post-crisis potential growth, not least since they are less subject to revisions than conventional methods based on production functions