by Paavo Suni
The Research Institute of the Finnish Economy, ETLA
on August 5th, 2010

The August estimates of the Eurogrowth Indicator, calculated by Euroframe, show the same pattern of strengthening growth for the second and third quarters of 2010 as the July estimates already predicted. The year-on-year growth would reach 1 percent in the second quarter and 1.5 per cent in the third. The quarter-to-quarter growth estimates - which should be interpreted cautiously - indicate strong rebound in the GDP growth during the second and third quarter to more than two per cent of average annualised growth from the modest 0.7 per cent annualised growth in the previous two quarters.

The forces driving improving year-on-year GDP growth predictions are the same as in the previous forecast. The loose monetary policy – measured with cyclically corrected short term interest rates with a lag of two quarters – continues to have rather strong positive contribution to growth, while the external environment (the US ISM indicator factor) has lost some of its strong positive contribution. The predicted growth is in fact accelerating mainly thanks to a strong rebound in domestic industrial and retail trade factors. Recent coincident strongly negative retail trade effects will level off and industrial expectations, which affect the indicator with a lag of one quarter, have actually been turning positive in the summer quarter. The effect of the real exchange rate of the euro vis-à-vis the USD dollar turns, however, negative in spite of recent weakness of euro as it affects the indicator with a lag of two quarters.

An estimated strong rebound in Euro Area growth contains unusually much uncertainty. First, the growth estimate for the first quarter (-0.2 %) deviates substantially downwards from the official Eurostat estimate (0.6 %). If the Eurostat estimate is correct the Eurogrowth indicator may technically overstate the strength of the rebound in the second and third quarter. Second, the intensified sovereign debt crisis in April and especially in May has affected expectations surprisingly little. While strong policy actions seem to have succeeded in calming down the markets, the risk of another setback is not insignificant as risk measures, e.g. based on pricing of 10-year government bonds, have remained high.

You may find this information in other languages:

• French

The Euro Growth Indicator is calculated by the Observatoire Francais des Conjonctures Economiques (OFCE, Paris) in cooperation with the EUROFRAME group.

The purpose of this leading indicator is to anticipate the development of the GDP in the euro area two quarters ahead of official statistics. The indicator considers surveys from industry and retail sectors, the short term real interest rate (in relation to the GDP growth rate), the real exchange rate of the euro to the dollar and the US ISM index for industry.

Inside

• A new simpler EMU indicator (OFCE, pdf) - [12/2000]
• Methodological Note in English and in French - [07/05/2000]
• Historical Series (OFCE, xls)

For further information, please contact Hervé Péléraux