Euro Growth Indicator

Euro Growth Indicator September 2017



Quarter 2016 :01 2016 :02 2016 :03 2016 :04 2017 :01 2017 :02 2017 :03 2017:04
Euro Growth Indicator 1.5 1.8 1.7 2.0 2.1 2.2 2.4 2.4
Eurostat 1.7 1.7 1.7 1.9 1.9 2.2    



Euro Growth Indicator shows strong growth for the second half of 2017

by Markku Lehmus

ETLA Helsinki

on September 6th, 2017

The Euro Growth Indicator, calculated by the Euroframe group in September 2017, shows that euro area GDP growth will remain strong during the third quarter of 2017. The indicator suggests that quarter-on-quarter GDP growth in the euro area would be 0.65, implying that the growth in the third quarter would be quite as strong as it was in the second quarter, according to the flash estimate produced by Eurostat (it came in slightly below the latest indicator estimate for Q2 of 0,7 percent). The Euro Growth Indicator also implies a year-on-year growth rate of 2.40 per cent for the euro area third quarter.The first estimate of the indicator for the fourth quarter of 2017 suggests steady quarterly growth of 0.60 per cent. This would convert to 2.40 per cent annual GDP growth for the fourth quarter.

The robust GDP growth in the third quarter is almost solely due to the improved economic sentiment in the industrial sector. In addition, the exchange rate and the construction sector also contribute slightly positively to the indicator value. By contrast, the household sentiment makes a small but negative contribution to the indicator’s value in the third quarter. This pattern changes in the fourth quarter estimate, when the growth level is maintained mainly due to a positive development of sentiment in the household sector. In addition to that, sentiment in the construction sector contributes positively to the indicator value. On the other hand, the industrial sector sentiment, together with the real euro per dollar exchange rate, contributes negatively to the fourth quarter indicator value.

To conclude, the Euro Growth Indicator for the third and fourth quarters gives no indication of an imminent slowdown of the improved growth momentum in the euro area, suggesting that the accelerated pace of expansion which started in the second half of 2016 may continue into 2018.



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.


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