Recovery in the euro area

by Hervé Péléraux

OFCE - French Economic
on April 4th, 2014

The EUROGROWTH indicator still signals an improvement of the euro area outlook in the winter 2014. According to the April estimate, real GDP will grow by 0.6 percent in the first quarter of 2014 and 0.4 percent in the second quarter. On a year-over-year basis, GDP growth turned positive in the fourth quarter of 2013 according to Eurostat figures (+0.5 percent) for the first time since the last quarter of 2011. According to the EUROGROWTH indicator, GDP growth will accelerate in the first half of 2014 to +1.3 and +1.5 percent in the first and second quarters respectively.

The improvement in short-term growth prospects is driven by a strong turnaround in confidence indicators starting from late 2012, especially in industry. By mid-2013, assessments on production and order books had recovered their late 2009 levels, when GDP grew by nearly 0.5 percent q-o-q. This holds true also for the turnaround in the household survey which has been substantial in 2013. The consumer confidence indicator has already passed its 2011 peak, despite the poor situation on the labour market and the still high level of unemployment at near 12 percent. However, households may be highly sensitive to the stabilization of unemployment. A minor role has been played both by the real euro/dollar exchange rate and the construction survey so far, with little contributions to the indicator’s forecasts.

As a consequence, the recovery signal which has been anticipated for several months by the indicator is getting stronger although the expansion path has been somewhat overestimated regarding the latest quarter official growth figures. However, the indicator gave the right signal for the end of the euro area recession in 2013 which became effective according to national accounts.

Hard data available so far for the 1st quarter of 2014 signal an improvement of the euro area economic outlook. Production in the manufacturing sector in January is higher than the average of the fourth quarter of 2013 for main euro area economies and industrial new orders experienced a strong increase in Germany last February, largely higher than expected. All in all, although the indicator forecasts are still more optimistic than the Consensus forecast, there is a chance for a strengthening in the growth path, at least in the short-term.

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.

For any further information, please contact Hervé Péléraux

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