On how I project the Korean industrial production

A primary economic data in the Korean fixed income market is an industrial production index. This monthly data, although the BOK's monetary policy is not so data-dependent, frequently influences the market because the data represents a condition of manufacturing sector, which is one of the most important parts in the Korean economy.

Then how can we forecast this data? My recent research suggests that the 'base effect' is a valuable source to anicipate the Korean industrial production index.


Exhibit 1. y-o-y change of the Korean industrial production (1)

The charts attached above illustrate y-o-y change of the Korean industrial production from 2012 to 2014. Even in a glimpse view, the headline data tends to be released in the opposite direction of the data released a year ago. A correlation coefficient between series of 2012 and 2013 is -0.81, and between 2013 and 2014 is -0.60.

The reason why this phenomenon occurred is that the Korean industrial production is in a flat trend. See the chart below.

Exhibit 2. y-o-y change of the Korean industrial production (2)

Not only the industrial production but also almost every economic indicators in Korea have continued to be flattened since 2012, and it made a base effect dominant. Thus if you want to project Korean industrial production, above all things, check the data of previous years as long as this flat trend is prolonged.