Euro Growth Indicator April 2018
|Quarter||2016 :03||2016 :04||2017 :01||2017 :02||2017 :03||2017 :04||2018 :01||2018:02|
|Euro Growth Indicator||1.8||2.0||2.1||2.4||2.8||3.0||2.6||2.2|
Economic momentum in the euro area seems to have peaked
by Klaus-Jürgen Gern
on March 28th, 2018
Growth in the euro area has been robust in the first quarter of 2018, but is poised to decelerate markedly in the second quarter, according to the April Euro Growth Indicator calculated by the EUROFRAME group of economic research institutes. The first quarter GDP forecast is 0.6 per cent, on par with Eurostat growth estimate for the fourth quarter 2017, but lower than the fourth quarter estimate of the Euro Growth Indicator. For the second quarter the Indicator estimates growth of 0.3 per cent, suggesting that the euro area is about to experience noticeably slower growth in the months to come. The Indicator estimate for the first quarter 2018 is almost unchanged from March, whereas the estimate for the second quarter has been revised down by 0.1 percentage point. On a year-over-year basis, growth would decelerate to 2.2 per cent in the second quarter, down from 2.6 per cent in the first quarter and 2.7 per cent in the last quarter of 2017.
The deceleration of growth in the first two quarters of this year apparent in the Indicator is mainly due to a substantial deterioration of sentiment in the industrial sector, which affects the Indicator coincidentally. Lower confidence of private households, entering the Indicator with a lag of one quarter, has also contributed to the reduction of the growth estimate, although to a lesser extent. The evolution of the foreign exchange rate (lagged by two quarters) continued to give a small negative contribution to growth, while construction survey results (lagged by five quarters) continued to impact on the Indicator positively.
All in all, the April 2018 Euro Growth Indicator casts a shadow on the benign outlook for the euro area economy, which over the past months had been consistently upgraded by most forecasters. While the extent of the slowdown in the economy may be exaggerated to some extent by the Euro Growth Indicator as the expansion has been overestimated, especially in the fourth quarter of last year, the decline in the Indicator is clearly a signal that growth momentum in the euro area has peaked for the time being.
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.