Euro Growth Indicator

Euro Growth Indicator October 2016

 

Quarter 2015 :01 2015 :02 2015 :03 2015 :04 2016 :01 2016 :02 2016 :03 2016:04
Euro Growth Indicator 1.4 2.3 2.4 2.2 1.5 1.8 1.7 1.8
Eurostat 1.8 2.0 2.0 2.0 1.7 1.6    

 

 

Expansion in the euro area to continue at moderate pace

by Klaus-Jürgen Gern

IfW Kiel

on October 3rd, 2016

The economic expansion in the euro area seems to have found traction again, according to the October estimate of the Euro Growth Indicator calculated by the EUROFRAME group, after last month's estimate had signalled a more temperate assessment of the current economic momentum. The indicator forecasts 0.4 per cent growth in the third quarter accelerating to 0.5 percent in the fourth quarter of this year. The indicator estimate for Q3 has been revised up from 0.36 per cent calculated in September to 0.45 per cent in October, the estimate for Q4 has increased from 0.37 to 0.49 per cent. On a y-o-y basis this would translate into growth of 1.7 and 1.8 per cent in Q3 and Q4, respectively, which is in the range of the 1.8 per cent growth rate registered by Eurostat for 2016Q2.

The upward revision in the quarterly growth estimates is mainly due to an improved economic sentiment in the industrial sector. The acceleration of growth from the third to the fourth quarter is reflecting an improvement in household confidence which is entering the indicator with a lag of one quarter. Slightly better assessment of the economic situation in the construction sector is also pushing the indicator up (with a lag of five quarters), whereas the contribution of the exchange rate has a slightly negative impact.

All in all, the October Indicator suggests that the negative fallout from Brexit decision that seems to have weighed on economic sentiment in September has been less pronounced than expected. At the same time, the absolute value of the individual elements of the indicator is currently rather small. Thus technically the constant and the lagged GDP growth rate are dominating the Indicator’s October estimate, resulting in a growth rate close to the recent trend and slightly above what is widely regarded as being the current growth rate of potential output in the euro area. This would imply a continuation of the modest economic upswing that has been evident in the euro area economy over the past 1½ years or so.

 

 

 

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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