Euro Growth Indicator August 2014
Weak momentum in Euro Area growth
|Quarter||2012 :04||2013 :01||2013 :02||2013 :03||2013 :04||2014 :01||2014 :02||2014 :03|
|Euro Growth Indicator||-0.59||-0.61||-0.93||0,06||0.83||1,30||0,90||1.22|
Weak momentum in Euro Area growth
by Paavo Suni
The Research Institute of the Finnish Economy, ETLA
on August 5, 2014
The Euro Area growth remains weak in the second and third quarters of 2014 according to the Eurogrowth Indicator calculated by the Euroframe group in August 2014. The forecast quarter-to-quarter growth rates are 0.3 and 0.4 per cent, which translate into 0.9 and 1.2 per cent in year-to-year comparison, respectively. The estimates are unchanged from the previous calculation in July.
The predicted growth is quite fragile as the contribution of industrial survey is weakening rather strongly, probably reflecting the rising uncertainty due to widening conflict in Ukraine, very low inflation environment and sluggish industrial growth in Germany. On the other hand the growth has been supported by the households’ improving confidence since late 2012, which probably reflects improving labour markets and recent measures of the ECB aimed at revitalising lending. The growth impacts of construction survey and the real euro-dollar exchange rate remained rather neutral. The weakening of the euro vis-à-vis the USD in the summer will support the growth with a lag.
All in all, the weak recovery since the second quarter in 2013 seems to remain fragile and sluggish, as the substantial weakening in industrial managers’ confidence undermines the growth momentum. The rising tensions between Russia, the EU and the US in the context of crisis in Ukraine are already increasing uncertainty with a negative impact on the Russian economy and Russian-linked businesses in other countries. If the crisis will develop to a trade war with rising energy prices, the effects would be very damaging to economic developments across the world.
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.