Real-time weakness of the global economy: a first assessment of the coronavirus crisis

Series: Working Papers. 2015.

Author: Danilo Leiva-Leon, Gabriel Perez-Quiros and Eyno Rots.

Published in: Journal of Applied Econometrics, v.39, Issue 5, August 2024, pp. 813 - 832

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Real-time weakness of the global economy: a first assessment of the coronavirus crisis (1 MB)

Abstract

We propose an empirical framework to measure the degree of weakness of the global
economy in real-time. It relies on nonlinear factor models designed to infer recessionary
episodes of heterogeneous deepness, and fitted to the largest advanced economies
(U.S., Euro Area, Japan, U.K., Canada and Australia) and emerging markets (China,
India, Russia, Brazil, Mexico and South Africa). Based on such inferences, we construct
a Global Weakness Index that has three main features. First, it can be updated as soon
as new regional data is released, as we show by measuring the economic effects of
coronavirus. Second, it provides a consistent narrative of the main regional contributors
of world economy’s weakness. Third, it allows to perform robust risk assessments based
on the probability that the level of global weakness would exceed a certain threshold of
interest in every period of time. With information up to March 2nd 2020, we show that
the Global Weakness Index already sharply increased at a speed at least comparable
to the experienced in the 2008 crisis.