Euro area GDP growth expected to remain on track

by Hervé Péléraux

OFCE Paris

on July 8th, 2015

According to the July EUROGROWTH Indicator estimate, GDP growth in the euro area will slightly accelerate to 0.6 per cent in the second quarter of 2015 from 0.4 percent both in the final quarter of last year and in the 1st quarter of 2015. Regarding the second quarter, the estimate is unchanged as compared to last month. The July estimate for the third quarter is revised downwards, from +0.7 percent to +0.5 percent. But at this point, this slightly negative revision does not question the outlook for a recovery: the expansion path in the euro area would remain the highest since the first half of 2011, either on a quarterly or on a year-on-year basis.

Growth is supported by a strong positive contribution from the household sector. The improvement of consumer confidence reflects the effect of both lower energy prices in terms of purchasing power and the gradual but continuous decline in the unemployment rate from the very high level reached in early 2013. A positive contribution of the business climate in the manufacturing sectors is also expected in the second quarter of 2015, but the confidence of firm managers weakened since April, driving again a negative contribution in 2015Q3. At the same time, the effect of the devaluation of the euro against the dollar will support growth more strongly, the lagged effect of the exchange rate peaking in the third quarter of 2015. By contrast the construction survey, which affects growth estimates with a lag of more than one year, is dampening the forecasts.

Clearly, the Indicator suggests that the euro area economy will remain on a recovery track up to summertime. The situation has never been so favourable in terms of external and internal conditions since 2011. On the external side lower energy price and euro exchange rate will support internal and external demand. On the internal side, the massive quantitative easing measures implemented by the ECB should support a recovery in credit markets and stimulate private investment while fiscal consolidation lessened somewhat in member countries. However, the Greek issue is unsettled so far. Uncertainty about an agreement between the Greek government and Greek debt creditors is at its highest level, which could increase volatility in euro area activity in the very short term, as the recent drop in the industrial confidence may suggest.

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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