Euro Growth Indicator

Euro Growth Indicator February 2015

Quarter 2013 :02 2013 :03 2013 :04 2014 :01 2014 :02 2014 :03 2014 :04 2015:01
Euro Growth Indicator -0.7 -0.1 0.4 1.3 1.2 0.9 0.8 0.9
Eurostat -0.6 -0.3 0.4 1.1 0.8 0.8    

Weak momentum in Euro Area growth continues in winter 2015

by Paavo Suni

ETLA Helsinki

on February 10th, 2015

The Euro Area growth remains weak in the winter 2014/2015 according to the Eurogrowth Indicator calculated by the Euroframe group in February. The forecast quarter-to-quarter growth rate for the fourth quarter of 2014 is 0.3 per cent, unchanged from the January estimation. The forecast growth rate for the first quarter of 2015 inched up by 0.1 percentage points to 0.4 per cent. The year-on-year growth rates are 0.8 and 0.9 per cent, respectively.

The small improvement in the estimated first quarter growth stems from industrial managers’ improved confidence, which affects the Indicator coincidentally. The support is still weak, however. The impact of construction sector confidence, affecting the indicator with a lag of five quarters, has been on the rise since spring 2014.

All in all, the Eurogrowth indicator continues to point to only moderate growth for the Euro Area in the winter 2015. It is possible that the coincident impact of the industrial survey in the first quarter of 2015 will be corrected upwards in the next estimations, as more information becomes available. The new massive bond-purchase program by the ECB, introduced after the commission survey in January 22, should affect industrial expectations positively, especially as it adds to the strong support provided by the sharp decline in the oil price and the substantial weakening of euro. However, the uncertainty relating to the problems with Greece and the crisis in Ukraine have intensified, which can attenuate confidence and Euro Area GDP growth in the first quarter.

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.


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