Indicator approach to business cycle forecasting in Indonesia

This study aims to investigate the business cycles in Indonesia by attempting to construct two composite leading indicators (CLI), namely, BCIl and BCI2 (for the· common reference series of business cycle, Industrial Production Index (lPI) and real Gross Domestic Product (GDP) respectively) using monthly data to predict the business cycles in Indonesia. The constructed BCIl which uses IPI as reference series successfully predicted all downturns in the industrial sector reasonably from 2004Ml to 2014Ml1. On the other hand, the constructed BCI2 which uses real GDP as reference series also correctly predicted all downturns of the Indonesian economy from 2000M3 to 2014Ml1. Both BCIl and BCI2 can be utilized in different ways for the economy of Indonesia. Hence, policymakers, businesses, investors should consider using the BCIl and BCI2 as early indicators to predict the direction of the industrial sector and the economy of Indonesia