Euro Growth Indicator February 2019
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Euro area GDP growth to remain moderate in the first quarter of 2019
by Catherine Mathieu
on February 1st, 2019
Euro area GDP grew by 0.2 per cent in the fourth quarter of 2018, according to the preliminary flash estimate released by EUROSTAT on 31 January 2019. This is slightly less than the 0.3 per cent growth anticipated by the EUROGROWTH indicator calculated by the EUROFRAME group of economic research institutes. Not all EMU countries have released so far their preliminary GDP estimate for the fourth quarter, but among the larger economies GDP growth continues to vary substantially from one country to another: from a robust 0.7 per cent in Spain, to 0.3 per cent in France, and to a fall by 0.2 per cent in Italy. German GDP growth may still have been dragged down by the implementation of the new EU-wide WLTP (Worldwide Harmonised Light-Duty Vehicle Test Procedure).
According to the EUROGROWTH indicator, euro area GDP growth would slightly decelerate from 0.3 per cent in the fourth quarter of 2018 to 0.25 per cent in the first quarter of this year. This deceleration is entirely driven by the deterioration of the sentiment in the industrial sector, which plays coincidentally in the indicator. The other variables playing in the indicator all have a slightly positive contribution to growth in the first quarter: confidence in the construction sector (which plays with a five quarter lag in the indicator), households’ confidence (which plays with a one-quarter lag in the indicator), and the euro exchange rate vis-à-vis the US dollar (which plays with a two-quarter lag in the indicator).
On a year-over-year basis, euro area GDP growth would continue to decelerate from its previous peak of 2.8 per cent in the third quarter of 2017 to 1.1 per cent only in the first quarter of 2019. A few downside risks for euro area short-term prospects have receded over the last months: oil prices have decelerated from 80 dollars in September 2018 and stabilised since then at around 60 dollars per barrel for the Brent; Italian sovereign bonds spreads with German bonds have come down since November. But several major downside risks still prevail in the very short-term: the trade dispute between the US and China, and the uncertainties around Brexit, especially of a no deal Brexit by 29 March.
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.