Euro Growth Indicator June 2016
|Euro Growth Indicator
Steady but still moderate economic expansion in the euro area
by Klaus-Jürgen Gern
on June 5th, 2016
In the summer half of 2016, the economic expansion in the euro area which started in 2013Q2 is expected to continue at a solid though moderate pace, according to the June estimate of the Euro Growth Indicator calculated by EUROFRAME. The indicator forecasts 0.4 per cent growth in both the second and third quarter of this year, following the 0.5 per cent growth rate published by EUROSTAT for first quarter 2016. The indicator estimate for Q2 has been revised up slightly from 0.3 per cent calculated in May, the estimate for Q3 is the first one available. The q-o-q growth pattern would translate into a gradual acceleration of growth on a y-o-y basis from 1.5 per cent in the first quarter to 1.6 and 1.7 per cent in the second and third quarter, respectively.
While fluctuations of quarterly growth on aggregate are limited going forward, the forces behind the expansion are going to change. Had industry surveys that impact the indicator contemporaneously worked as a drag on growth in Q1, in Q2 and Q3 they are giving a major positive contribution. Conversely, the contribution to growth of household surveys (lagged by one quarter), which had been an important source of strength in previous quarters, is diminishing in Q2 and turning negative in Q3. The impact of the real exchange rate on growth remains almost insignificant as the euro-dollar rate has not moved substantially for almost one year now (the exchange rate enters the regression with a lag of 2 quarters). At the same time, the contribution of the construction survey, which enters the indicator with a long lag of 15 months and had been noticeably positive in the winter semester 2015/16, is becoming small.
All in all, the expansion in the euro area seems to maintain its path of a relatively sluggish recovery. For the time being, persistent impediments to growth related to the legacy of the crisis, such as deleveraging pressures and weaknesses in the banking sector in a number of countries, in combination with uncertainties associated with a fragile world economic environment prevent the substantial monetary stimulus and support from low commodity prices (even after their recent partial correction) to translate into a more dynamic upturn.
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.