Euro Growth IndicatorJuly 2017
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|Euro Growth Indicator||2.1||1.5||1.8||1.8||2.0||2.0||2.2||2.2|
High growth momentum in the euro area
by Klaus-Jürgen Gern
on July 4th, 2017
The euro area economy is expected to continue to grow at solid rates in the summer semester of 2017, following the acceleration of economic activity registered in the first quarter of the year. According to the July Euro Growth Indicator calculated by the EUROFRAME, GDP growth is forecast at 0.7 per cent growth in the second quarter and 0.4 per cent in the third quarter, respectively. The Indicator estimates have been upwardly revised slightly from last month’s estimate, especially for the third quarter where the growth estimate has been raised from 0.3 to 0.4 percent as a result. On a year-over-year basis this would translate into growth of 2.2 percent in both quarters, up from 1.9 percent in the Eurostat estimate for the first quarter.
The current strong growth momentum is mainly due to bullish sentiment in the industrial sector, and a gradual moderation in this component of the indicator is the major reason for the slower (though still solid) GDP growth expected for the third quarter. A small positive contribution is also coming from the movements of the euro exchange rate (lagged by 6 months). Household sentiment 3 months ago and construction survey results, which enter the indicator with a long lag of five quarters, currently have only limited impact on the indicator.
All in all, the July Euro Growth Indicator confirms that the recovery in the euro area economy remains on track despite the additional uncertainty associated with political events such as the decision of the UK to leave the EU and the possibility of substantial policy changes by the new US administration. It should be noted, however, that for quite some time now there has been a certain disconnect between economic sentiment indicators and hard economic data. As a result, the Euro Growth indicator, which heavily uses sentiment indicators in its calculation, in recent quarters tended to overestimate growth in the euro area relative to the Eurostat published data, although the direction of the economy is clearly matched and recent Eurostat revisions have reduced the gap.
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.