Euro Growth Indicator shows growth will accelerate slightly in the next two quarters as the effects of transitory factors fade out

by Markku Lehmus

ETLA Helsinki

on November 30th, 2018

The Euro Growth Indicator, calculated by the EUROFRAME group in November 2018, suggests that euro area GDP growth accelerates to a quarterly rate of 0.3 per cent in the fourth quarter of 2018. This would come after a slightly weaker third quarter GDP figure, which showed 0.2 per cent growth for the euro area, according to the estimate produced by Eurostat. The Indicator implies that the year-on-year growth rate would be 1.4 per cent in the fourth quarter of 2018, a growth rate which is 0.3 percentage points slower than the Eurostat’s estimate for growth in the third quarter of 2018.

The Indicator suggests that euro area growth will speed up in the first quarter of 2019, implying a quarterly growth rate of slightly less than 0.5 per cent for that quarter. This would convert into a 1.4 per cent year-on-year GDP growth, in line with the yearly growth rate estimated for the fourth quarter of 2018.

A moderately better GDP growth in the fourth quarter of 2018 stems from positive sentiments in the construction sector and household sector. Also, the real euro per dollar exchange contributes slightly positively to the fourth quarter indicator’s value. Instead, the sentiment in the industrial sector contributes clearly negatively to the fourth quarter indicator’s value.

The GDP growth in the first quarter of 2019 is driven by the same factors as in the fourth quarter this year. Hence, a higher quarter-on-quarter growth rate is due to positive sentiments in the construction sector and household sector while the real euro per dollar exchange gives a slightly bigger positive boost to the first quarter indicator’s value. The sentiment in the industrial sector contributes negatively to the first quarter indicator’s value.

All in all, the Euro Growth Indicator was slightly optimistic about euro area GDP growth for the third quarter of 2018. However, the slowdown in the third quarter euro area growth was partly due to transitory factors such as new emissions tests that dampened car production, especially in Germany. As a consequence, some rebound can be expected for the fourth quarter 2018 and the first quarter 2019, as the effects of these transitory factors fade out. This is in line with the growth rates suggested by the indicator.

Indicator methodology

The Euro Growth indicator forecasts the euro area GDP quarterly growth rate two quarters ahead of official statistics using a bridge regression. Regressors are chosen among survey data and financial data, i.e. series which are rapidly available and not revised. The monthly series are converted to a quarterly basis by averaging their monthly values. Series selection is conducted on an econometric basis starting from the set of monthly business and consumer survey results released by the European Commission: industry, construction, retail trade, services and consumers. From this large dataset, a few series are significant stemming from industry (production trend and expectation), construction (confidence indicator) and households surveys (major purchases). Two financial series are also significant, i.e. the growth rates of the real euro/dollar exchange rate and of a Euro area stock market index.

Some of these regressors are leading by at least two quarters, and may be used as such to forecast GDP growth. Some others are not leading or are leading with a lead which does not suit a two-quarter-ahead forecast horizon. These series have to be forecast, but over a short time-horizon which never exceeds four months. All these forecasts are implemented using monthly autoregressive equations.

The Euro Growth indicator is run each month, soon after the release of business and consumer survey results.

For any further information, please contact Hervé Péléraux

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