Euro Growth Indicator April 2016
|Quarter||2014 :03||2014 :04||2015 :01||2015 :02||2015 :03||2015 :04||2016 :01||2016:02|
|Euro Growth Indicator||0.7||0.9||1.2||1.9||2.0||1.9||1.3||1.2|
Moderate pace of growth in the euro area
by Klaus-Jürgen Gern
on April 5th, 2016
Growth in the euro area is maintaining a steady but moderate rate of growth in the first half of 2016, according to the April estimate of the EUROGROWTH Indicator calculated by the EUROFRAME. The indicator forecasts 0.3 per cent growth in both the first and second quarter of this year, equal to the quarterly rates published by EUROSTAT for the third and fourth quarter 2015. The indicator estimates have been virtually unchanged from the March estimate. Reflecting the continued moderate growth momentum growth on a y-o-y basis should slow from 1.6 per cent at the end of last year to 1.2 per cent in 2016Q2.
The main support for growth currently comes from private consumption with a robust positive contribution from the household surveys. At the same time growth in the first quarter is dampened by a significant deterioration of sentiment in the industrial sector in the beginning of the year. The negative contribution of this component remains in the second quarter although to a somewhat diminishing degree. The positive contribution of the real euro/dollar exchange rate (lagged by 2 quarters) to growth which has pushed the indicator until the end of 2015 has faded in the first quarter and is recovering only slightly in the second quarter. The estimate for GDP growth in the second quarter remains steady at 0.3 per cent as the upside from a smaller drag from industry and a modest stimulus from the exchange rate is erased by somewhat less bullish sentiment in the household sector and a drop in the contribution of the construction survey which enters the indicator with a long lag of 15 months.
All in all, the euro area economy looks to remain on its path of a relatively sluggish recovery. Supportive elements such as the low oil price – mainly reflected in robust consumer sentiment – and low interest rates are counteracted by detrimental forces, including uncertainties with respect to the outlook for the world economy, especially emerging markets, and imponderables related to the legacy of the euro crisis.
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.