Euro Growth Indicator July 2018
|Quarter||2016 :04||2017 :01||2017 :02||2017 :03||2017 :04||2018:01||2018 :02||2018:03|
|Euro Growth Indicator||2.0||2.1||2.5||2.9||3.1||2.8||2.3||2.2|
Stable growth in the euro area
by Klaus-Jürgen Gern
on July 1st, 2018
Growth in the euro area has slowed down in the first quarter of 2018 from the high momentum that prevailed during 2017, but will not to decelerate further for the time being, according to the July Euro Growth Indicator calculated by the EUROFRAME group of economic research institutes. The second quarter GDP forecast is 0.5 per cent, a notch higher than the Eurostat growth estimate for the first quarter (0.4 per cent), and the estimate of the Euro Growth Indicator for the third quarter now stands at 0.6 per cent. The Indicator estimates for the second and third quarters 2018 have been revised up by 0.1 and 0.2 per cent, respectively. On a year-over-year basis, growth would decelerate to 2.3 per cent in the second quarter, down from 2.5 per cent (Eurostat estimate) in the first quarter and 2.2 per cent in the third quarter of this year.
The uptick in the Indicator growth estimate for the second quarter reflects a stabilization of sentiment in the industrial sector, which affects the Indicator coincidentally, and the fact that the euro has not appreciated further in the course of this year, as the exchange rate enters the Indicator with a lag of two quarters. The upward revision of the forecast for the third quarter is mainly due to an improvement of confidence of private households (lagged by one quarter) and a notable positive impact of the construction survey results, which impact on the Indicator with a long lag of five quarters.
All in all, the July 2018 Euro Growth Indicator suggests that the euro area economy continues to grow at a decent pace for the time being. While the expansion clearly has lost some momentum, the economy seems to have stabilized at a level of growth that is consistent with further reduction of unemployment and continued increase of total economy capacity utilization, although at a more moderate pace.
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.