Euro Growth Indicator

Euro Growth Indicator August 2015



Quarter 2013 :04 2014 :01 2014 :02 2014 :03 2014 :04 2015 :01 2015 :02 2015:03
Euro Growth Indicator 0.5 1.4 1.2 0.8 0.8 1.1 1.5 2.1
Eurostat 0.4 1.1 0.8 0.8 0.9 1.0    



Euro Area growth is gaining momentum

by Paavo Suni

ETLA Helsinki

on August 5th, 2015

Euro area growth is strengthening in the course of this year according to the EUROGROWTH Indicator calculated by the EUROFRAME group in August 2015. GDP growth has accelerated slowly on quarter-on-quarter basis from a modest 0.2 per cent in the summer of 2014 to 0.4 per cent in the first quarter of this year. The indicator points to a further acceleration of growth to 0.6 and 0.7 per cent in the second and third quarter, respectively. The estimated growth rates are the highest since winter 2010/2011. The third quarter estimate was raised by 0.2 percentage points from the July estimation, while the second-quarter estimate was unchanged. On a year-on-year basis, the growth estimates for the second and third quarters are the highest since the spring of 2011 at 1.5 and 2.1 per cent, respectively.

The improving outlook indicated by the EUROGROWTH indicator is broad-based, supported by a strong contribution from households and strengthening contributions from industrial managers’ confidence and price competitiveness. Consumer confidence, which affects the indicator with a lag of one quarter, benefited from low energy prices and some improvement in the labour markets. The growth impact from improved price competitiveness, captured by the USD-euro real exchange rate with a lag of two quarters, has strengthened this year and is expected to peak in the third quarter of 2015. Industrial survey data that contributes to the indicator coincidentally is negative from the second quarter of 2014 up to the first quarter of 2015, but turns positive in the second quarter, improving the growth estimates. It is only the impact of construction sector confidence, affecting GDP with a lag of five quarters, which drags down growth in the second and third quarters of 2015.

Clearly, the EUROGROWTH indicator predicts rather solid growth for the Euro area in the course of 2015. Surprisingly, the deep difficulties in resolving the Greek insolvency have had no clear effect on the confidence of economic agents apart from weaknesses in the confidence in early summer. Instead, the massive unconventional bond-purchasing programme by the ECB, low interest rates, a weaker euro and continuing low energy prices, together with improved tools to take care of liquidity crises in the euro area, have stabilised the development. However, the possible setbacks relating to the economic and political development of Greece and a possible adverse development of the crisis in Ukraine remain risks that could lead to a deterioration of the outlook in the months to come.

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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