Euro Growth Indicator February 2020
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Euro area GDP expected to continue to accelerate to 0.5 per cent in the first quarter of 2020, but…
by Catherine Mathieu
on February 7th, 2020
Euro area GDP grew by a mere 0.1 per cent in the fourth quarter of 2019, according to the preliminary flash estimate released by EUROSTAT on 31 January 2020. This is slightly below the Euro Growth Indicator estimate of 0.2 per cent calculated by the EUROFRAME group of economic research institutes last month.
According to the Euro Growth Indicator, euro area GDP will grow by 0.5 per cent in the first quarter of 2020. the growth acceleration is due to the improvement in the industrial sector confidence, which plays coincidentally in the indicator. The contribution of confidence in the construction sector (which plays with a five-quarter lag in the indicator) would remain unchanged. Households’ confidence (which plays with a one-quarter lag in the indicator) would very marginally contribute to lowering growth, while the euro exchange rate vis-à-vis the US dollar (which plays with a two-quarter lag in the indicator) would slightly contribute to increase growth.
On a year-over-year basis, euro area GDP growth would remain close to 1 per cent. However, it should be noted that the indicator uses data and surveys produced before the outbreak of a novel coronavirus was announced in China. Thus, the indicator’s estimate embeds information available at a time when two major downwards risks had receded: first, US-Chinese trade tensions had eased with the signing of Phase One trade deal on 15 January. Second, following the agreement reached on Brexit by the UK government and the EU, and the outcomes of the December 2019 UK general elections, the UK was to leave the EU on 31 January 2020, with a transition period planned to run until the end of 2020. Survey data, especially in the manufacturing sector, suggested a less deteriorated outlook until the end of January. But the outbreak of the coronavirus, a deadly disease, will have substantial negative economic impacts in China and beyond, at least in the first quarter of 2020 and possibly for a longer period of time.
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.