Euro Growth Indicator January 2016
|Quarter||2014 :02||2014 :03||2014 :04||2015 :01||2015 :02||2015 :03||2015 :04||2016:01|
|Euro Growth Indicator||1.2||0.7||0.9||1.2||1.8||2.0||1.9||1.9|
Increased risks do not substantially reduce the outlook for growth in the euro area for the time being
by Hervé Péléraux
on January 13th, 2016
According to the EUROGROWTH indicator calculated by the EUROFRAME group in January 2016, euro area GDP growth will be rather sustained at the turn of 2015 and 2016. The expected quarter-to-quarter growth rates are unchanged from the previous December 2015 estimate, namely 0.7 per cent in the fourth quarter of 2015 and 0.5 percent in the first quarter of 2016. On a year-over-year basis, GDP growth would reach 1.9 per cent, which means an acceleration from the 1.6 percent currently estimated by Eurostat for the third quarter of 2015.
While the level of growth has remained steady, the driving forces behind these estimates have been changing. The positive impact of the real euro/dollar exchange rate had an important impact during the summer reflecting increased competitiveness of the euro area after the marked devaluation that occurred in the end of 2014 and in early 2015. But this is going to fade: The stabilization of the exchange rate around 1.1 dollar for one euro since the first quarter of 2015 will drive its contribution to zero in the turn of 2015 and 2016. Instead, the contribution of the construction survey should turn positive in the fourth quarter of 2015 and in the first quarter of 2016, reflecting better developments in the sector started one year ago. Meanwhile, the contribution from consumer survey remains at high levels, as in the previous quarter supported both by the continuous decrease in the unemployment rate since early 2013 and the new drop in energy prices since summer 2015. The industry survey is still having a positive contribution to the forecasts for the fourth quarter 2015 but losing impact in the beginning of 2016, which explains the deceleration of growth expected for the first quarter.
All in all, none of the components of the indicator signals a substantial deceleration of euro area growth in the near term. The positive factors that have supported the recovery up to now remain active, such as the strong monetary stimulus from the ECB and the resulting low interest rates and weaker euro, together with cheaper energy prices, and less restrictive fiscal policy. However negative risks in emerging countries have risen, especially in China, which may question the outlook for foreign demand and reduce the momentum in industrial activity. Moreover, the terrorist attacks in Paris last November have brought back security concerns in many European countries. But for the time being, sentiment indicators have not been substantially affected by growing dangers.
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.