Euro Growth Indicator December 2017
| Quarter | 2016 :02 | 2016 :03 | 2016 :04 | 2017 :01 | 2017 :02 | 2017 :03 | 2017 :04 | 2018:01 |
| Euro Growth Indicator | 1.9 | 1.8 | 2.0 | 2.1 | 2.4 | 2.6 | 2.8 | 2.7 |
| Eurostat | 1.8 | 1.7 | 1.9 | 2.0 | 2.3 | 2.5 |
Euro Growth Indicator shows growth peaking in the last quarter of 2017
by Markku Lehmus
ETLA Helsinki
on December 6st, 2017
Euro Growth Indicator, calculated by the EUROFRAME group in December 2017, shows that euro area GDP growth will peak before the turn of the year, and it is expected to remain strong also in the first quarter of 2018. The Indicator suggests quarter-on-quarter GDP growth in the euro area of 0.9 per cent, implying accelerating growth in the last quarter of this year from 0.6 per cent in the third quarter according to the Eurostat flash estimate. The Euro Growth Indicator also implies a year-on-year growth rate of 2.8 per cent for the euro area fourth quarter.
The first estimate of the indicator for the first quarter of 2018 suggests quarterly euro area growth of 0.5 per cent. This implies that growth would decelerate in the coming months but remain robust. The resulting year-on year growth rate would decline only marginally to 2.7 per cent in the first quarter next year.
The strong GDP growth in the fourth quarter is mostly due to an improved economic sentiment in the industrial and household sectors. The construction sector contributes slightly positively to the indicator value, whereas the real exchange rate has a small but negative effect on Euro Growth indicator in the fourth quarter.
Interestingly, the same two factors that raise the indicator value in the fourth quarter – industrial and household sectors – produce close to zero effect on the indicator in the first quarter of 2018. Again, the construction sector contributes positively to the indicator but the opposite holds true for the real exchange rate. Nevertheless, all these factors have only a small influence on the indicator value in the first quarter of 2018.
To summarize, the fourth quarter GDP growth implied by the Euro Growth indicator is estimated to accelerate, encouraged mostly by the good sentiment in the industrial and household sectors. Even if these two sectors cannot provide euro area with a further positive push in the first quarter of 2018, the expansion in the euro area economy is expected to continue at the beginning of next year, if somewhat less vigorously.
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.