Euro Growth Indicator September 2019
| Quarter | 2018 :01 | 2018 :02 | 2018 :03 | 2018:04 | 2019 :01 | 2019:02 | 2019 :03 | 2019:04 |
| Euro Growth Indicator | 2.6 | 2.3 | 1.9 | 1.3 | 1.1 | 0.9 | 1.1 | 1.3 |
| Eurostat | 2.5 | 2.2 | 1.7 | 1.2 | 1.2 | 1.1 |
Euro Growth Indicator shows slightly accelerating growth for the next two quarters
by Markku Lehmus
ETLA Helsinki
on September 4th, 2019
The Euro Growth Indicator, calculated by the Euroframe group in September, suggests that euro area GDP’s quarterly growth rate will be 0.2 per cent in the second quarter of 2019. This would imply that the quarterly growth would correspond to the growth rate observed also in the second quarter, which was estimated to be 0.2 by the Eurostat. The indicator implies that the year-on-year growth rate would be 1.1 per cent in the third quarter of 2019, a rate which, again, equals the Eurostat’s estimate for a yearly growth in the second quarter of 2019.
The indicator suggests that euro area growth will accelerate slightly in the fourth quarter of 2019, implying a quarterly growth rate of 0.4 for the monetary area. This would convert into a 1.3 per cent year-on-year GDP growth, a slight improvement from the third quarter’s yearly growth rate. Hence according to the Indicator, the growth would remain robustly positive in the next two quarters in the euro area.
The GDP growth in the third quarter of 2019 is supported by the sentiment in the construction sector. Also, growth is sustained by developments in the real euro per dollar exchange rate. It is the sentiment in the industrial sector which drags down the third quarter indicator’s value. Also, the sentiment in the household sector contributes slightly negatively to the third quarter’s indicator’s value.
The fourth quarter’s GDP growth is supported by the same factors that were relevant in the third quarter as well. Thus, growth is given a small push by the positive sentiment in the construction sector and developments in the real euro per dollar exchange rate. The sentiments in the industrial and household sector continue to contribute negatively to the fourth quarter indicator’s value, but importantly, the strongly negative effect coming from the industrial sector sentiment is declining. This would explain most of the acceleration in GDP in the final quarter of this year. Nevertheless, while the improvement stems from only one month’s observation, we note that the positive interpretation of the data may change with the next month’s data also available.
All in all, the Indicator suggests that euro area growth stays positive in the next two quarters even though particularly the third quarter’s growth is expected to be sluggish. Nevertheless, the Indicator suggests that growth will accelerate in the fourth quarter to a quarterly rate of 0.4 per cent, slightly supported by the sentiment in the construction sector and developments in the real euro per dollar exchange rate combined with a smaller negative contribution stemming from the industrial and household surveys. However, it is only the last month’s observation in the survey that depicts an improvement in the industrial sector sentiment, hence one should be cautious when reading these estimates.
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.