Euro Growth Indicator February 2017
|Quarter||2015 :02||2015 :03||2015 :04||2016 :01||2016 :02||2016 :03||2016 :04||2017:01|
|Euro Growth Indicator||2.3||2.4||2.1||1.5||1.8||1.8||1.9||1.9|
A steady growth path in the near term
by Hervé Péléraux
on February 2nd, 2017
According to the February estimate of the Euro Growth Indicator calculated by EUROFRAME, euro area growth will remain solid in the first quarter of 2017. The indicator suggests growth of close to 0.7 per cent in 2017Q1. The Indicator estimate has not been revised from January. However, one may note that the Indicator slightly overestimates Eurostat’s preliminary estimate of 0.5 per cent for the final quarter of 2016 released on Tuesday 31. On a y-o-y basis the indicator’s estimate would translate into growth of 1.9 per cent in 2017Q1.
The steady growth expected in the turn of 2016 and 2017 mainly relies on improved developments in the industrial sectors. Confidence in industry significantly strengthened in December 2016, leading to the highest contribution of the manufacturing sectors to the Indicator since early 2014. Contributing to the acceleration of growth in 2017Q1 is also a better assessment of the economic situation in the construction sector, with a – long – lag of 5 quarters. Nevertheless, households’ confidence, with a lag of one quarter, is not contributing to growth anymore in 2017Q1, after a still positive impact during the previous quarter. The contribution of the exchange rate is turning from slightly negative in Q4 to slightly positive in the first quarter of this year, but the lack of trend of the euro against the dollar has kept the contribution of the exchange rate close to zero since 2015Q4.
All in all, the improvement in the economic climate depicted by business surveys since late 2016 suggests a higher growth path in the near term translating to a close to 2 per cent y-o-y growth rate. For the time being, economic agents seem to remain insensitive to a more risky and uncertain environment, regarding the consequences of the vote for Brexit, the policies to be implemented by the new US administration which could affect the trade relationship of the euro area with the US, the unresolved banking problems in the euro area and higher energy prices and interest rates.
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.