by Hervé Péléraux,

French Economic Observatory
on May 10th, 2013

According to the April estimate of the Eurogrowth indicator, conceived by Euroframe, the real GDP growth in the euro area could turn positive in the first quarter of 2013 (+0.3 percent). However, this rebound, which may partially compensate for the steep decline at the end of last year, could be short-lived since the growth rate is expected to fall back below zero in the second quarter of 2013 (-0.1 percent). The May indicator forecasts downward revised the former ones regarding the second quarter of 2013, -0.1 percentage point. A less favorable contribution of the industrial survey than expected last month is the reason for this relapse which emphasizes the fact that the signal for a turnaround is extremely fragile.

The improvement in the near-term outlook comes from the industry survey which has shown a strong upturn since November 2012. As a consequence, its contribution turned from negative to positive in the first quarter of 2013. However, the fall back of the industrial survey in March points out that some caution is warranted given confidence indicators may be somewhat volatile while reflecting sentiments about the financial market situation or developments in the euro area crisis, in addition to current business conditions. The other components of the indicator, construction and household surveys, are still rather weak and do not contribute to the expected positive growth. The lagged effect of the decline in the euro/dollar exchange rate up to mid-2012 still supports growth in the first quarter of this year, but the contribution will turn negative in the next quarter reflecting the appreciation of the euro in the second half of 2012.

All in all, it is too early to say that the euro area has troughed in the last quarter of last year. Experience has shown that indicators may not be very precise in predicting the exact timing of a turnaround. Furthermore, if the fears of the euro zone’s breakup receded thanks to the bail-out of Greece and the ECB’s OMT program, the outlook for fiscal balances is still uncertain although drastic budget consolidations will be renewed in most member countries, which means continuing negative impacts on activity for the euro area as a whole.

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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