Euro Growth Indicator

Euro Growth Indicator January 2015

Quarter 2013 :02 2013 :03 2013 :04 2014 :01 2014 :02 2014 :03 2014 :04 2015:01
Euro Growth Indicator -0.7 -0.1 0.4 1.3 1.2 0.9 0.8 0.9
Eurostat -0.6 -0.3 0.4 1.1 0.8 0.8    

Near-term outlook for the euro area has brightened up a bit

by Hervé Péléraux

OFCE Paris

on January 15th, 2014

The EUROGROWTH indicator forecasts are unchanged in January 2015 from December 2014. According to the indicator, euro area GDP will increase by 0.3 per cent in both the last quarter of 2014 and the first quarter of 2015 which is only slightly better than the 0.1 and 0.2 per cent quarterly growth rates, respectively, released for the two previous quarters. On a year-on-year basis, the growth path would remain very weak at less than 1 percent as compared to earlier recovery growth rates which were higher than 2 percent in 2004 and 2010 for instance.

The slight improvement in growth prospects is mainly due to a better confidence in industry and, with a long lag from late 2013, in construction. However, the contribution of the business climate in manufacturing sectors alone is too weak to drive a substantial growth pace. Fortunately, the drop in the euro/dollar exchange rate over the past six months is beginning to have a positive impact on growth forecasts, playing with an estimated 2-quarter lag in the EUROGROWTH indicator. The exchange rate is expected to have a significant positive contribution on the indicator’s estimates in 2015Q1. The only factor dragging down expectations is the consumer sentiment indicator which has been decreasing since its mid-2014 peak.

According to the EUROGROWTH indicator, the outlook in the euro area as a whole will not change much in the near term, with GDP growing by around 1 percent on an annual basis. While the external environment is brightening somewhat, thanks to the depreciation of the euro and the sharp fall in the oil price, positive signals stemming from business surveys are lacking. One of the reasons could be that fiscal consolidation in most European countries continues to drag down activity, although in a milder way than a few years ago. Facing weak growth and still high levels of unemployment, euro area member countries are setting up non-cooperative strategies driving deflationary processes which dampen internal demand. In the current context, the ECB will maintain an aggressive monetary policy and quantitative easing measures, even probably expanding them in 2015. But many observers fear that monetary policy alone will not be able to stop the dangerous trend towards deflation and depression in the euro area.

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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