The Nexus between Economic Sentiment Indicator and Gross Domestic Product; a Panel Cointegration Analysis

Abstract Economic Sentiment Indicator (ESI) became the most popular composite indicator within the EU with the purpose of monitoring and/or forecasting business cycles in one country or for a region as a whole. Since it is calculated regularly, on a monthly base, and is based on five distinct confidence indicators, the main concern is whether the ESI can be explained and/or can explain the current, past or future values of relevant macroeconomic variables. This implies its relevance in predicting both short- and long-term economic outcomes of, for example, variation in income, unemployment fluctuations, consumption change, inflation modifications, sectoral alterations and etc. The question that arises often in academic, as well as within the EU decision-making circles is whether the ESI be used as an explanatory variable with valuable information for modelling the national output developments. Therefore, the aim of this paper is to reveal the true strength and significance in the ESI-GDP nexus for the EU. Empirical research is based on panel cointegration analysis that utilizes data on the ESI and GDP over the period 2000-2018 for the EU28 countries. The causal relationship between the variables appears to be consistent in the short- and long-run across the panel, suggesting that ESI movements do explain movements in national output, hence can help both private and public sector decision-makers to evaluate their goals and plan their actions.