Euro Growth Indicator August 2016
|Quarter||2014 :04||2015 :01||2015 :02||2015 :03||2015 :04||2016 :01||2016 :02||2016:03|
|Euro Growth Indicator||1.0||1.2||1.9||2.0||1.9||1.5||1.8||1.8|
Euro Growth Indicator suggests some strengthening of growth in the euro area
Markku Lehmus and Paavo Suni
on August 2nd, 2016
The Euro Growth Indicator, calculated by the Euroframe group in August 2016, suggests an acceleration of GDP growth in the third quarter of 2016 both in comparison to the second quarter and to the previous estimate in July. Quarter-on-quarter GDP growth in the euro area would accelerate to 0.6 per cent in the third quarter, up by 0.1 percentage points from July’s indicator value. The implied year-on-year growth rate would be 1.8 per cent.
The Indicator shows a rather robust 0.5 per cent growth rate for the second quarter in quarter-on-quarter terms which is higher than the preliminary flash estimate of Eurostat of 0.3 per cent.
The acceleration of GDP growth in the third quarter is based on the improvement of industrial expectations, which affects the indicator coincidentally. The contributions of the other factors, which affect the indicator with various lags, were unchanged and weak in the third quarter. The household factor, which has been a major factor of growth since 2014, turned negative and contributions of the USD-euro real exchange rate and construction surveys were flat, close to zero.
The acceleration of euro area GDP growth in the second and third quarters of 2016 is based on the improving contribution of the coincident industrial factor. Note, however, that the third-quarter value of the factor is estimated and will change, if the industrialists’ expectations will change in September. The GDP estimate will then also change. Particularly, the generally expected negative output effects of Brexit may still be in the pipeline, or Brexit may have decelerated otherwise strong GDP growth.
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.