The Composite Leading Indicator of Mongolia

Mongolia’s first composite leading indicator (CLI) is designed here to give early signals of turning-points in economic activity in the near future. This information is of prime importance for economists, businesses and policy makers to enable timely analysis of the current and short term economic situation. Mongolia’s CLI uses monthly GDP as a proxy measure for economic activity. It focuses on the business cycle, defined as the difference between the smoothed GDP data and its long-term trend. Mongolia’s CLI aims to predict turning-points in this business cycle estimate. The CLI is composed from a set of selected economic indicators whose composite provides a robust signal of future turning points. Out of 51 monthly time series covering the real economy, financial markets, international trade and the government sector that pass these criteria the quantity of imported diesel, M2, FDI, total import, international gold price and new real estate loans were selected on the basis of their predictive precision of turning points. The composite leading indicator based on these 6 components not only successfully predicts the turning points but also is highly correlated with the cyclical movements of the GDP growth.