Euro Growth Indicator October 2017
|Quarter||2016 :01||2016 :02||2016 :03||2016 :04||2017 :01||2017 :02||2017 :03||2017:04|
|Euro Growth Indicator||1.5||1.8||1.7||2.0||2.1||2.2||2.4||2.5|
Euro area economy remains in high gear
by Klaus-Jürgen Gern
on October 4th, 2017
Economic growth in the euro area will continue at a robust pace at least until the end of this year, according to the October Euro Growth Indicator calculated by the EUROFRAME group of economic research institutes. GDP is forecast to grow by 0.7 per cent in both the third and the fourth quarter of 2017. The Indicator estimates have been revised upward from September marginally for Q3 and by almost 0.1 percentage point for Q4 suggesting that economic momentum is carrying into the final quarter of the year. On a year-over-year basis growth would accelerate to 2.4 per cent and 2.5 per cent, respectively, up from 2.2 per cent in the current Eurostat estimate for the second quarter.
The current strong growth is mainly due to bullish sentiment in the industrial sector. While this component of the indicator is losing steam in the fourth quarter and the real euro/dollar exchange rate (lagged by 6 months) is starting to impact negatively in response to the appreciation earlier in the year, a more positive household sentiment, which enters the indicator with a lag of 3 months, is pushing the indicator up. The construction survey results, which enter the indicator with a long lag of five quarters, currently only have a small impact on the indicator.
All in all, the October Euro Growth Indicator suggests that the economic upturn in the euro area remains on track. With hard economic data having more and more caught up over the year with the bullish Indicator readings, the October result suggests that the euro area economy will enter 2018 with considerable momentum.
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.