An Evaluation of Leading Indicators in the Context of a Swedish Recession

Abstract: The aim of this paper is to evaluate potential leading indicators of a recession in Sweden. To answer the question potential leading indicators are first identified with previous findings in literature and with the current state of the Swedish financial system as background. Then these variables will be included in a probit regression at different forecasting horizons. The horizons are one, two and four quarters ahead. The explanatory variables that are included in the regressions are Interest, Rate Spread, Credit, House Prices, OMX30 index, NYSE index, VIX, Inflation Gap, Current Account-to-GDP, and Unemployment rate, where the Spread is significant at all horizons and the stock price indices at a forecasting horizon of two quarters ahead. Finding that interest rate spread is significant in predicting the recession probability in Sweden confirms previous empirical findings. Also, from last the predicted recession probability in the models the interest rate spread does not have to decrease all too much to spur a recession probability over 50%. Furthermore, when performing a robustness check the results are somewhat inconclusive which implies that more contributions to evaluating leading indicators for small open economies like Sweden is needed in the literature.